When the Federal Reserve Buys ETFs, Thank the Bank of Japan
Japan’s central bank has been a pioneer in the monetary experiments the U.S. is trying now.
The biggest economic crisis since the Great Depression has seen the U.S. Federal Reserve do a lot of surprising things. Among them: It’s said it will buy shares of some bond exchange-traded funds, to help make sure there’s enough demand for corporate bonds. It’s odd to think of the Fed snapping up shares of funds right alongside ordinary investors. But the idea of a central bank buying ETFs isn’t completely unprecedented—the Bank of Japan got there a long time ago.
Japan is to central banking what the old Bell Labs was to the global tech industry: a hotbed of ideas that get adapted by others. Going back to the late 1990s, it was forced to pioneer unorthodox methods to try to spur growth and restart the economy’s credit machine. In doing so, it’s shown other central banks that they have a broad array of options when they’ve already cut interest rates to zero. “The BOJ is doing a big favor for those central banks,” says Shigeto Nagai, head of Japanese economic research at Oxford Economics in Tokyo and a former head of the international department at the BOJ. “A big difference is that the BOJ had created many of its measures during its fight against deflation over a period of years, while the Fed, for example, needed new weapons immediately. They didn’t have much choice but to use BOJ tools.”