Today we can look east and let me reverse my usual order by looking at financial markets first because there is something rather extraordinary.
BOJ DOESN’T BUY ETFS ON MONDAY, DESPITE MORNING DECLINE IN TOPIX. ( @financialjuice)
That caught my eye because even with this morning’s fall of 2.1% the Nikkei 225 is just shy of 39,000! We are not many days away from all-time highs being reached with them being particularly significant in the sense that they ended one feature of the Lost Decade(s) experience. Yet as you can see the era of central planning and control had some expecting them to step in and buy this morning and sing along with Queen.
Don’t stop me nowI’m having such a good time, I’m having a ballDon’t stop me nowIf you wanna have a good time, just give me a call
We can look back more than a decade to the genesis of this as the Bank of Japan pumped up the Abenomics back in October 2014.
The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 3 trillion yen (tripled compared with the past) and about 90 billion yen (tripled compared with the past), respectively.
As an aside it also buys commercial real estate investments the risk of which has been shown by what is happening in the US and Europe at the moment. But my main point was the original decision to pump up the Nikkei from around 10,000. Of course you can argue that they should never have bought domestic equities. But at the time you could argue that the market was under valued in a sort of Lost Decade driven equity market depression.
But having got drink on its power the Bank of Japan carried on and following the Covid pandemic bought even more.
The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180
billion yen, respectively, on annual paces of increase in their amounts outstanding.
Whilst they have added “upper limit” the equity amount has been quadrupled as they showed all the signs of being drunk on their own power. Whilst the Nikkei did drop to 16,380 when Covid hit it was at 27,000 and rising as 2020 ended so what was the purpose of buying more then? Yet the rate of purchase was much higher, which goes against all normal logic and the original reason for this part of QQE.
You may have spotted that this is the most explicit version of an equity market put (option) that we have as The Tokyo Whale has consistently bought on down days. Indeed it has got into people’s heads so much they expect it in a relative boom. If we look back to a speech from Board Member Takata last Wednesday he seems this a quite a success.
First, the asset deflation that led firms to pursue management with minimum assets has improved significantly over the past decade. Asset prices have risen steadily since the beginning of the 2010s, mainly in the stock and real estate markets. The Nikkei 225 Stock Average has recovered to around a record high level.
He even took time to blow his own trumpet.
At the same time, I consider that the Bank’s patient continuation of monetary easing has also been contributing to the stability in Japan’s financial markets through higher asset prices.
Also note what is one of the most explicit “The Wealth Effects! The Wealth Effects!” I can recall.
assuming the monthly investment of a fixed amount in the Nikkei 225 Stock Average starting from age 22, when many people are likely to begin working. With the ongoing rise in stock prices over the past decade or so, people in their 20s and 30s have experienced hardly any negative returns.
The issue here is that in its role as The Tokyo Whale the Bank of Japan has an enormous position which it measures as 37.2 trillion Yen. But those are the levels it bought at so it must be of the order of 60 trillion at present market levels. But then comes the catch and my long-running theme of do not start something without an exit plan, as The Tokyo Whale would be incredibly lucky to find people willing to buy its position of it and in most circumstances selling would send the market a lot lower. Elvis described it like this.
We’re caught in a trapI can’t walk outBecause I love you too much, baby
Indeed Board Member Takata sees no end in sight.
It also suggests that a shift in such behavior could take longer than expected, perhaps the decade it takes to form the next generation.
What about the Japanese Government Bond Holdings?
The large numbers i have already discussed are now about to be dwarfed by the 601 trillion Yen of Japanese Government Bonds or JGBs bought by The Tokyo Whale. We have a new big figure as we move into the 600s. But there is a problem here too so let us look at this via the Japanese owned Financial Times.
Policymakers at the Bank of Japan are tackling a series of thorny policy debates as they confront the practicalities of raising interest rates for the first time since the summer of 2006.
Regular readers may have a wry smile as the MSM has been expecting this for more than a year now. Whereas my “face culture” counter-argument has worked rather well. But now in Japanese culture it works better as they may be happier to raise when others are expected to cut interest-rates.
Among those questions is whether to raise rates first to zero or directly into positive territory; what to do about the central bank’s vast bond portfolio; and most important of all, what to signal about the path of interest rates beyond the first increase.
I have helped out the Financial Times with the emphasis there as it tries to slide by that issue. Back on the 2nd of October last year I was pointing this out.
As you can see the Bank of Japan ignores marked to market losses. If I owned so many JGBs I might be tempted to do that as well but of course I would go straight to jail. Even under current policy they have large losses at a benchmark yield of 0.75%. Imagine what they would be if Yield Curve Control stopped and interest-rates rose and you quickly come to the conclusion that fears over its balance sheet have been a factor on the Bank of Japan not raising interest-rates.
Remember at current interest-rates the Bank of Japan is making a “running” profit by charging itself -0.1% on its bond holdings. Not much per se but when you multiply that by 600 trillion! Plus there is a bond yield of around 0.75%. So a nice little earner especially as it ignores capital losses, something else which would have you or I in jail.
Comment
The existence of The Tokyo Whale poses all sorts of questions. Let us take the Bank of Japan line that it has been a success. That then gets awkward if we look at economic growth. Japan has revised its recession away overnight but still had a rough end to 2024. If we switch to Real Wages they continue to take punishment
JAPAN SEES 0.6% YEAR-ON-YEAR DROP IN JANUARY INFLATION-ADJUSTED REAL WAGES: GOVT ( @financialjuice)
What is success here? If we switch to equity holdings Board Member Takata seems tot want the Japanese to buy The Tokyo Whale’s position.
Meanwhile, in a deflationary environment, it was rational for households to hold their assets in cash and deposits. Today, household financial assets in Japan exceed 2,100 trillion yen. Nevertheless, unlike in the United States and Europe, Japanese households have exhibited a growing preference for holding assets in cash and deposits, with cash accounting for more than half of their financial assets, and they have come to avoid holding risk assets.
But he has made buying the equity market much more expensive, so will that discourage rather than encourage?
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