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BOJ's first REIT write-down sparks fear of even bigger ETF losses

Bloomberg
Bloomberg • 3 min read
BOJ's first REIT write-down sparks fear of even bigger ETF losses
The Bank of Japan’s first recorded impairment loss in REITs has some market watchers concerned over the possibility of a larger hole from its far more sizeable purchases of ETFs.
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The Bank of Japan’s first recorded impairment loss in real estate investment trusts has some market watchers concerned over the possibility of a larger hole from its far more sizeable purchases of exchange-traded funds.

In a little-noticed development at the time, the central bank booked a JPY15.9 billion ($205 million) impairment loss last fiscal year ended March 31 from its J-REIT investments. That followed a collapse in REIT shares at the height of the coronavirus pandemic, with the Tokyo Stock Exchange REIT Index losing half its value at one point.

While the write-down is purely a paper loss, and the bank still made a profit on its J-REIT holdings thanks to dividend returns, market watchers worry similar losses on its ETF holdings could impact the bank’s future asset purchases, as new calculations show the break-even point for its ETF purchases reached JPY20,000 for the first time.

Japan’s central bank has JPY33.5 trillion in ETF holdings, which it started buying a decade ago in a policy aimed at lowering the premium investors demand for risk assets on top of the risk-free rate of government bonds.

“The policy of lowering risk premia has finally led to a burden on Japanese citizens,” said Shingo Ide, chief equity strategist at NLI Research Institute, referring to reduced payment from the BOJ to Japan’s national treasury. “The BOJ is taking on significant risk.”

Ide calculated that the bank at one point had a JPY3.5 trillion unrealised loss in its ETF holdings. “If the timing was worse, then there’s a chance that the central bank would have ended the fiscal year in the red,” he said.

With a balance sheet bigger than Japan’s economy, the BOJ has an outsized role in Japan’s financial market. Before the pandemic and a sales tax increase pushed Japan into recession, investors were closely watching for any sign that the central bank could be forced to taper its asset purchases.

When the BOJ began the purchases a decade ago, the breakeven point for ETFs on the Nikkei 225 stood at around JPY9,000, according to NLI. By the end of July, that stood at over JPY20,000.

“Standard investment theory says you buy when prices fall,” said Tetsuo Seshimo, a fund manager at Saison Asset Management Co. “The more the bank buys as prices rise, the greater the impairment risk.”

Others are less concerned over the risk, which has been a common, but yet-to-materialise concern among opponents of the bank’s policies — which were once considered unconventional, but have since been copied by central banks the world over.

“Markets go up and down, so these risks are taken into account from the moment they decide to buy risk assets,” said economist Yuichi Kodama at Meiji Yasuda Research Institute. “It’s not like the BOJ will become insolvent because of this.

Governor Haruhiko Kuroda himself dismissed the concern in March on the losses from its holdings of ETFs and J-REITs, saying that the losses do not directly mean the central bank will fall into the red, as it has revenues from other assets. “Over the long term, we can always make a profit,” he said.

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