Nikkei 225 Drops on BoJ's Altered ETF Buying Plan

Asian equities again followed their US counterparts and closed the day in the red amid falling oil prices and higher US Treasury yields. Stocks in Europe are also trading lower today.

Chinese Hang Seng Index and Japan’s Nikkei 225 both closed 1.41% lower, while Shanghai Composite fell nearly 1.7%. MSCI’s index of Asia-Pacific stocks outside Japan followed with a fall of 1.5%.

“Stronger growth and higher inflation but no rate hikes is a potent cocktail for risk assets and equity markets,” said Nomura economist Andrew Ticehurst.

“The message for bonds is more mixed: while the anchoring of the short end is a positive, market participants may come to worry that the forecast rise in inflation might not be temporary and that the Fed risks ‘overcooking it’.”

Nikkei 225 received another hit after the Bank of Japan (BoJ) decided to abandon its decade-long buying of the index. Instead, the central bank will only buy ETFs tracking the Topix index.

BoJ also decided to widen the band at which it allows long-term interest rates to move around its target. Moreover, it removed guidance to buy 6 trillion yen ($55 billion) of ETFs on an annual basis.

“We judged that it was necessary to maintain monetary easing at a sustainable form to achieve our 2% inflation target,” the BOJ said in a statement.

This allows the bank to buy bigger dips and concentrate on periods that are yielding turmoil.

“Even if the coronavirus pandemic subsides, we might face another shock. We decided to maintain the 12-trillion-yen ceiling, and buy ETFs more flexibly and in a nimble fashion,” BoJ Governor Kuroda said at a press conference following the statement release.

In the US, Nasdaq futures are up about 0.7% as US 10Y pulled back overnight to below 1.7%.

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