TOKYO (Reuters) - The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank.
By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.
The Bank of Japan currently buys six trillion yen ($53 billion) of Japanese stocks annually through exchange traded funds (ETFs), making it the single largest investor of Japanese stocks.
But the central bank’s current pace of heavy intervention has raised various worries. The BOJ is already among the largest shareholders for many Japanese companies and its snowballing equity portfolio makes an eventual exit from stimulus more difficult.
Speaking at the Reuters Global Investment 2018 Outlook Summit on Thursday, Sago said selling put options is an attractive solution for the BOJ to ease those concerns.
Put options are the right to sell an asset at a certain price. Thus their sellers will have the obligation to buy the asset at the pre-agreed price. Investors typically sell options when they think the market will not move much.
If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.
“When you sell (out-of-the-money) puts, you don’t actually buy stocks unless the stock market falls. So the BOJ can do without buying stocks while committing itself to buying if the market crumbles,” Sago said.
The BOJ’s selling of put options should also reduce the market’s volatility, thus boosting risk-adjusted returns and making it easier for investors to buy stocks, he added.
Sago also said the BOJ should also consider raising its 10-year bond yield target above the current zero percent, because there is little benefit to the overall economy from keeping bond yields so low.
($1 = 113.00 yen)
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Editing by Jacqueline Wong