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The Bank of Japan (BOJ) will refrain from exchange-traded funds (ETF) buying despite the tumbling Japanese stocks, as the current rout likely falls short of new thresholds set in March for its ETF purchases, Reuters reports, citing findings unveiled by the central bank.

Key takeaways

“A closer look at an analysis the BOJ released in March in tandem with the new guidelines show the hurdle for buying ETFs has risen significantly and focuses not just on the degree of price falls but on volatility.”

“With estimates using two indicators – equity risk premium implied by option prices and yield spreads – the BOJ concluded that “the more volatile the market and the larger the size of purchases, the larger the effects of ETF purchases.”

“The analysis also pointed to survey results showing its ETF buying has a more positive effect “during periods of market instability,” such as the Brexit shock in 2016 and last year’s coronavirus pandemic-triggered rout.”

“It’s effective to buy huge sums when markets are severely unstable,” signalling that it would take a crisis like last year’s market crash to justify huge ETF purchases.

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