BOJ Share Buys: Bought Y136.8 Bln In Latest Period

Reviewed By Hitoshi URABE

Article:
"BOJ Share Buys: Bought Y136.8 Bln In Latest Period"
http://sg.biz.yahoo.com/030304/15/38hnw.html
(Dow Jones) Yahoo

Related Article:
"Bank of Japan warned on asset holdings"
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1045511268771
(By David Pilling) Financial Times

Comments:

When it was announced last September that the Bank of Japan would begin purchasing private company stocks that are held by commercial banks, just about everyone knowledgeable in money and finance were very surprised, and upset. The scheme was devised seemingly in order to save the stock market where prices kept tumbling by introducing a new prominent investor, and also to help salvage the ailing banks by relieving risks through letting those volatile securities off their books.

Nevertheless, the plan was deemed to have negative implications, as it can easily be assumed from the simple fact that no central bank in any economically developed country has adopted such a program. Indeed, it was recognized by critics as a means to revive the stock market at the cost of losing credibility of the Central Bank, whereby effectively degrading a part of their assets by exposing it to new risks. It was also a bailout scheme for commercial banks who would in effect be casting off the risks unto the Central Bank, who has no proficiency in handling private sector risks.

Actual purchases under the scheme began at the end of November. The procedure called for commercial banks to initiate, applying to the BoJ for purchases of stocks on their books. Upon acceptance by the BoJ of the proposed stocks, a deal would be struck at the prevailing market price.

It started slowly at first. Aside from the fact that they were testing the waters in the beginning, commercial banks were generally reluctant to sell their stocks as it meant recognizing on their books in real terms the losses incurred during depreciation of market prices.

The volume, however, did not stay low and has risen significantly since then, as the captioned article reports, which could be interpreted as that the banks, at least to a certain extent, have given up hope on early recovery of the stock market.

According to the scheme, BoJ would purchase up to 2 trillion yen cumulatively until this September, and then hold it for 4 years before beginning to sell them out discretionally to the market. But as more than 40% of the allocated 2 trillion has been utilized after little more than three months, there are already talks on possibilities to increase the amount.

It must be cautioned, however, that besides the inherent defects in the scheme as mentioned above, it has never been established that the program is truly effective in the pursuit of set policy goals, except possibly for diluting the focus of the real problem, and providing tranquilizing effect for some people.

Mr Hayami, the outgoing Governor of the BoJ was apparently not confident or even satisfied with the policy, at least in this respect of asset building by the central bank, as reported in the Related Article introduced above. In an interview, Mr Hayami is said to have warned the ever-increasing asset at the Bank of Japan through government bond purchases, and the risks associated with owning private company stocks, which would depreciate the credibility of the Central Bank, and places strain on its policy options.