In what might be the largest real-world experiment with Modern Monetary Theory (MMT) to date, the Bank of Japan (BoJ) has taken ownership to unprecedented levels. With an astonishing 80% of the country’s Exchange Traded Funds (ETFs) and roughly 7% of the entire Japanese stock market under its belt, according to data from Morningstar and the Tokyo Stock Exchange, the BoJ has essentially become the dominant player in its own market. Additionally, with a grip on about 55% of Japanese Government Bonds (JGBs), the central bank’s influence extends far beyond typical monetary policy tools.
This level of control has led to significant market distortions. The BoJ isn’t just a regulator; it’s practically the home team, the stadium, and most of the fans rolled into one. This massive intervention has kept interest rates artificially low and propped up stock prices, creating an environment where traditional market signals are hard to discern.
However, the winds of change might be blowing through Japan. With wage growth finally accelerating to a 32-year high, there’s a glimmer of hope that the economy might be on the cusp of a more sustainable growth path, potentially less reliant on monetary stimulus. This could prompt the BoJ to reconsider its strategy of heavy ETF and JGB purchases.
The big question looming over investors and policymakers alike is what happens when the BoJ steps back from its role as the market’s biggest buyer? The withdrawal of such a dominant player could lead to a significant realignment in bond yields. With the BoJ out of the batter’s box, bond yields might surge as the market adjusts to a new reality where demand isn’t artificially inflated by central bank purchases.
This scenario isn’t just a domestic issue; it has global implications. Japanese investors are significant players in global bond markets, and any shift in the BoJ’s policy could ripple through international finance, affecting everything from U.S. Treasury yields to emerging market debt. The fear is that not all market participants are prepared for this potential fastball, leading to volatility as markets reprice assets without the safety net of BoJ intervention.
⚠️THIS IS INSANE ⚠️
Bank of Japan owns ~80% of the country's ETFs and 7% of the entire Japanese stock market, according to Morningstar and the Tokyo Stock Exchange data.
Moreover, the BoJ holds ~55% of the Japanese government bonds.
Huge distortions 👇https://t.co/eqPKiNPIpS
— Global Markets Investor (@GlobalMktObserv) January 10, 2025
Sources:
https://www.reuters.com/markets/japan-bond-market-update-2024-12-15/
149 views