Japan pledges to support markets, but fails to calm investors

The Bank of Japan (BOJ) announced on Monday that it would ramp up its purchases of assets including corporate bonds to maintain stability in financial markets as investors continued to panic over the coronavirus pandemic.

Although the bank did not follow in the footsteps of central banks globally in lowering interest rates, BOJ Governor Haruhiko Kuroda said that it would not hesitate to ease financial conditions even more if needed, including by further lowering its already negative interest rate.

The BOJ also said it would offer a new zero interest-rate loan programme to ensure companies had the financing they needed.

“We can cut the rate deeper,” Kuroda told reporters in Tokyo on Monday, adding that the central bank was watching the impact of the virus closely. “We will do so if needed.”

The BOJ also said it would boost its purchases of exchange-traded funds (ETFs) – which are linked to benchmark stock exchange indexes – to stabilise their prices.

Under the programme, the central bank will be able to buy ETFs at an annual pace of up to 12 trillion yen ($113bn), double its current annual target of about 6 trillion ($56.5bn).

Kuroda said the BOJ wanted to send a message to investors that it was doubling its pace of ETF purchases to stabilise markets for as long as needed.

The measures, however, failed to calm investor nerves as Tokyo stocks slid to their lowest levels in three and a half years, with the benchmark Nikkei index skidding 2.5 percent in choppy trading to finish at 17,002.04, its lowest closing level since November 2016.

“The market got excited by the 12 trillion yen ($113bn) figure before quickly finding out a footnote that says it is the maximum figure,” said Yusuke Ikawa, Japan strategist at BNP Paribas.

The Nikkei’s volatility index, a measure of investors’ volatility expectations based on option pricing, jumped 17 percent to 60.03, its highest level since March 2011 when massive earthquakes and a tsunami struck Japan.

“The market is no longer reacting to each step the BOJ is taking, looking at whether any of them work. Rather, markets are reacting negatively because they have lost confidence in the BOJ,” said Yasuo Sakuma, chief investment officer at Libra Investments.

“Now it’s obvious that the BOJ has no card left to play.”

Earlier in the day, the United States Federal Reserve slashed interest rates in an emergency move and its major peers offered cheap US dollars to ease a logjam in global lending markets.

The coordinated global actions were reminiscent of the sweeping steps taken just over a decade ago to fight a meltdown of the global financial system, but this time the target was a fast-spreading health crisis with no certain end in sight.

Globally, more than 152,000 people have been infected and the death toll has exceeded 5,700 due to the coronavirus. Lockdowns and travel bans spread across the world over the weekend, affecting tens of millions of people.