Bank of Japan Confronts Two-Decade Land Slump With Asset-Purchase Program

By Mayumi Otsuma - Nov 3, 2010 9:50 PM PT

(Bloomberg)--The Bank of Japan’s planned purchases of real-estate investment trusts and exchange-traded funds may bolster investor confidence and support markets that have failed to recover ground lost since the global financial crisis. Governor Masaaki Shirakawa and his policy board will start a two-day policy meeting today to discuss the purchases, which are part of a broader 5 trillion-yen ($62 billion) fund unveiled last month. The bank brought forward its November meeting date by more than a week to speed up the purchases.

REIT prices have climbed since the BOJ announced its asset fund on Oct. 5 and analysts say the program may help curb a two- decade slide in land prices, easing the pain deflation has inflicted on an economy coping with slower growth and a stronger currency. Shirakawa last week said he wants the BOJ’s purchases to deepen trading. The planned buys “are an endorsement of the securities and encourage investors to participate in the market,” said Hide Ichii, a Tokyo-based analyst at CBRE Global Real Estate Securities, which manages over $2.5 billion of property stocks and real-estate investment trusts. “A surge in REIT prices will spark real-estate transactions and can eventually help shore up land prices.”

Last week, the BOJ said it has allocated 50 billion yen of its asset-buying fund to purchasing J-REITS and 450 billion yen for ETFs, which amount to 1.6 percent and 18 percent of their respective markets. BOJ officials have already received approval from the government to purchase the assets. REITs have lost 27 percent since September 2008 and ETFs are down 19 percent.

‘Counter Downside Risks’

The asset-buying program “suggests that we stand ready to counter downside risks for the economy and that can provide relief to financial markets and have a positive effect on corporate sentiment,” Shirakawa said at an economic forum in Tokyo today. “We need to continue to take appropriate policy action.” For the broader economy, the central bank’s initiative falls short of what’s needed to end deflation and combat the impact of the yen’s climb to a 15-year high against the dollar, economists from Citigroup Inc. to Morgan Stanley have said.

Asset purchases of 100 trillion yen “would be more appropriate,” Citigroup Chief Economist Willem Buiter and analysts including Tokyo-based Kiichi Murashima said last week. The 36-member Tokyo Stock Exchange REIT Index has advanced 1.3 percent since the BOJ announced the asset purchase plan. The 44-member Topix Real Estate Index was the best performer among the broader index’s 33 industry groups over the past three months, rising 12 percent.

‘Startled’

“The announcement has had a big impact, particularly on the J-REIT market,” by supporting prices, said Teizo Taya, a former BOJ board member and now an adviser to the Daiwa Institute of Research. “I was startled that the central bank embarked on the buying of those assets.” J-REITs represent about a fifth of Japan’s 45 trillion yen securitized real-estate market, government data show. Formed in September 2001, the market was created to be a financial tool that pools assets into tradable securities, making it easier for people to invest and creating liquidity in the property market.

Land prices in Japan have declined for almost two decades and their values are about half of what they were after the peak of Japan’s asset bubble economy in the late 1980s. Commercial- property prices are 60 percent of what they were in 1991, while residential values are at 35 percent of the peak.

Fed Move

The BOJ meeting follows a U.S. Federal Reserve policy gathering where the central bank decided to buy an additional $600 billion of Treasuries through June, saying that progress has been “disappointingly slow” in bringing down joblessness close to a 26-year high. While Shirakawa has said the Fed meeting wasn’t a factor in changing the BOJ’s schedule, deliberating policy today and tomorrow gives BOJ board members a chance to gauge financial market reaction to any Fed policy move. “The Fed’s decision is close to what financial markets had expected to see,” said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co. in Tokyo. “The chance is very small for the BOJ to make new policy changes” at this week’s meeting.

Shirakawa on Oct. 28 reiterated that expanding the asset fund is a “probable option” should the bank need to provide more stimulus; its benchmark overnight rate is already “virtually” zero after a cut last week. Establishing the fund’s framework tomorrow would let the bank increase the program.

‘Policy Ammunition’

“The BOJ wants to make sure it’s able to use the fund as policy ammunition as soon as possible” should it need to take further policy steps, said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees about $104 billion. Nevertheless, the program won’t be able to cure all of Japan’s deflation woes, Ichii said, “but at least the bank’s offer is considerably reducing the downside risks of the J-REIT market -- this effect in itself is enormous” as it will enhance trading.

The Nikkei 225 Exchange-Traded Fund, which tracks the performance of the benchmark stock index, jumped 1.8 percent on Oct. 5, when the BOJ announced the fund purchases. The index has since declined 3.9 percent on concern about the global growth and the yen’s advance against the dollar.

The central bank’s fund also plans to buy 3.5 trillion yen in government debt and 1 trillion yen in corporate debt, including lower-rated securities than those the BOJ bought in 2009 under a previous initiative. The bank may be inclined to increase its purchases of government debt in the fund rather than other securities, said Taya, the former BOJ board member. Corporate debt, ETF and REIT markets are relatively small in Japan and the large purchases could interfere in the market setting prices, he said.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net