Kuroda defends Japan central bank's ETF buying, sees no near-term exit

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said he saw no problems emerging from the central bank’s purchases of exchange-traded funds (ETF), shrugging off criticism its growing presence is distorting the stock market.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan October 31, 2018. REUTERS/Issei Kato

With inflation distant from the BOJ’s 2 percent target, it was premature to consider slowing or ending the bank’s purchases of ETFs - or trust funds investing in stocks, Kuroda said.

“I don’t think we’re at a stage where we need to debate an exit strategy for our ETF purchases,” Kuroda told parliament on Friday.

Under a massive asset-buying program deployed in 2013, the BOJ is buying government bonds and risky assets such as ETFs to achieve its ambitious 2 percent inflation target.

Critics have urged the BOJ to slow purchases of ETFs - trust funds investing in stocks - arguing that its huge presence is distorting markets and inflating stock prices beyond levels that reflect fundamentals.

Kuroda rebuffed such views, arguing that the BOJ’s ETF buying was part of efforts to achieve its inflation target and did not directly target specific stock price levels.

“I don’t think our ETF purchases are creating big distortions in the stock market,” or causing serious problems to corporate governance, Kuroda said.

The BOJ currently pledges to buy roughly 6 trillion yen of ETFs per year, though it added a phrase in July that its purchases could fluctuate depending on market conditions.

The BOJ now owns 77.5 percent of Japan’s ETF market, having bought nearly 23 trillion yen of the product since 2013, a senior central bank official told the same parliament session.

Unlike government bonds, ETFs do not have maturity so will not fall off the BOJ’s balance sheet unless the central bank sells them.

Academics warn the BOJ could be saddled with a huge pile of ETFs, as unloading them could face resistance from politicians worried about the impact on the stock market.

Kuroda said it was too early to debate whether and how the BOJ could unload ETFs, saying only the central bank would craft guidelines to do so when the appropriate time comes.

Asked whether the BOJ could spin off its ETF holdings to another body, Kuroda said he personally thought it was unlikely.

Stubbornly weak inflation has forced the BOJ to maintain its stimulus program, even as its huge buying dries up market liquidity and years of near-zero rates strain financial institutions’ profits.

Some analysts fret the central bank could miss the chance to re-stock policy ammunition to fight the next recession unless it starts to whittle down crisis-mode stimulus policies soon.

Kuroda said he did not have any preset idea of what tools the central bank should use in case it needs to ramp up monetary stimulus in the future.

“We need to carefully weigh the cost and benefit of any step we take. At present, I don’t see the need to take additional monetary easing steps,” he said.

Reporting by Leika Kihara; Editing by Chris Gallagher; Editing by Simon Cameron-Moore