The Japanese Plunge Protection Team Exposed: The BOJ's "1% Rule", Or The "Shirakawa Put" In Practice

Tyler Durden's picture

One of the most conspiratorial topics in all of fringe finance has been the existence of the plunge protection team, which while widely known to exist and intervene during major drops in the US capital markets, has never been actually seen in action (thank you Citadel trade ticket shredders). And while the US PPT has increasing grown irrelevant now that the Fed's open market intervention is no longer the source of folklore courtesy of Bernanke's self-professed third mandate vis-a-vis the Russell 2000, it does provide the tinfoil crowd with immense satisfaction to know that virtually always it ends up being proven in the long run not only when it comes to the big picture, but the nuances as well. Enter Nikkei's report (subscription required) on the BOJ's 1% Rule which is "propping up the Nikkei."

More: "Japan's stock investment community is buzzing with rumors about the Bank of Japan's "1% rule." These rumors suggest that the BOJ has been following a single guideline in its purchases of exchange-traded funds (ETFs) under a new, unorthodox program it launched last Dec. 15. The rule is that whenever the Topix index of all issues on the first section of the Tokyo Stock Exchange ends a morning session 1% or lower than the previous day's close, the central bank will try to prop up the stock market by purchasing ETFs in the afternoon session. The BOJ official in charge of such matters has refused to comment on the criteria the bank uses for its ETF purchases. But the numbers appear to confirm the chatter emerging from the rumor mill. Since Dec. 15, the BOJ has purchased ETFs through trust banks on all of the 18 days when the Topix index fell by 1% or more in the morning session." And since Vincent Reinhart has certainly noted in some of the recently unembargoed Fed minutes over the past decade precisely this simplistic (and last ditch) plan for market manipulation, we can't wait when the Fed, shortly after the failure of QE 7, announces publicly this time, that it will proceed to buy the SPY whenever the S&P drops more than 1%.

Some more on Japan's now completely exposed Plunge Protection Team:

The 1% theory appears to explain why the BOJ did not buy ETFs on March 11, when the Tokyo stock market plunged in the wake of the Great East Japan Earthquake. That morning, before the quake and tsunami hit, the Topix fell by 0.97%.

In these market-supporting purchases, the central bank bought approximately 20 billion yen worth of ETFs each time. This represents a fraction of the daily trading value on the first section of the TSE, which reached 1.2 trillion yen on Friday, for example.

But economists say the program is providing significant psychological support to the market. "By creating the impression that the central bank is committed to a specific rule for stock purchases, this approach is having positive psychological effects (on the market)," said Seiichiro Iwasawa, chief strategist at Nomura Securities Co.

Empirically, there is almost no doubt the rumor is fact:

The figures appear to support these arguments. On 44% of the days when the BOJ bought ETFs in an apparent response to a decline in the Topix of more than 1%, the stock market rebounded in the afternoon. The rebound ratio for the days when the BOJ didn't buy was 38%.

Since April, when the 1% rule became widely known among market players, this trend has become even more pronounced, with the ratios hitting 67% and 41%, respectively.

However, the BOJ's strategy is not solely increasing the chance of afternoon rebounds after morning declines. It is also probably helping to tame declines in the morning by making investors wary about a likely intervention by the central bank in the afternoon.

It is not clear whether the BOJ will continue to apply the rule to its ETF operations in the coming weeks. But many observers say the BOJ's moves have lightened the mood in a market that has otherwise been dragged down by the March 11 disaster, by highlighting the central bank's determination to prevent sharp declines in stock prices.

Japan's exports may be plunging but it sure is importing Fed market manipulation at a wholesale level:

A certain level of market intervention by the central bank is justifiable if stock prices are significantly oversold. But investors may be wading into dangerous waters if they bet too heavily on support from the BOJ.

The amount of money the central bank spends on each round of ETF purchases has increased from an initial 14.2 billion to 20.1 billion yen.

The BOJ's operations have reassured Japanese investors, as the purchases have eased their concerns about the dwindling foreign appetite for Japanese stocks, said Fumiyuki Takahashi, equity strategist at Barclays Capital Japan.

So far so good... But what happens when the "Shirakawa Put" expires?

But the program is set to expire in June 2012. And the BOJ has already used one-third of the 900 billion yen it had set aside for this purpose.

With the stock market currently on shaky ground, the BOJ may have to consider extending and expanding the program. But it cannot continue this untraditional scheme for long.

Sooner or later, the stock market will find itself without the central bank's policy support. When this happens, the fortunes of the market will depend solely on the nation's growth outlook.

Take the last sentence and then apply it to every single stock market in the developed economy in the world, which is by rough estimates, about 50% overvalued, and is thus nothing short of a government mandated Ponzi system, which is only legal because its unwind would expose modern capitalist society as one based on the biggest economic fallacy of all time.

Yet somehow Bernie Madoff has to go to jail for doing nothing more than what central bankers now do to the global multi-trillion stock market on a daily basis...

h/t Steve

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HungrySeagull's picture

The one who rolls the rock uphill needs to eat to keep strength.

Kind of hard to maintain one's strength when enduring radiation.

Id fight Gandhi's picture

Sisyphus is growing a third nut on that glowing rice.

Fidel Sarcastro's picture

BONZIiiiiiii (bitches)

Orly's picture

It's all gonna trickle out eventually.

:D

baby_BLYTHE's picture

although, they have been telling the American people for 25+ years it would 'Trickle Down', hell I am not even that old. 

We're soo doomed!

Goldtoothchimp09's picture

I was wondering how old you are...

Djirk's picture

the opposite actually, propping markets is a great asset re-allocation from the middle class to the rich.

Subprime JD's picture

Off topic, but you guys HAVE to check out the Iraq Stock Exchange. ISX. Its trading at 141, bottomed at the height of the war in 2006 at 25 points. Check out some of the listed stocks, for example Bank of Baghdad was trading at 30 dinars in 2005, and is now trading at 3.75 lol. With 110 billion barrels of recoverable crude, im going long on Iraq lol lol. Upside potential here is hugggeeee

ebworthen's picture

Unless, of course, the Chinese move in when we move out...

MisterAmbassador's picture

We will never leave Iraq.  We built that huge, $1 billion embassy there.

MisterAmbassador's picture

110 billion barrels is only like a three year world supply, twelve year US supply.

 

The most important video you'll ever see:  http://www.youtube.com/watch?v=F-QA2rkpBSY

sun tzu's picture

Saudi Arabia only has an 8 year world supply. I guess they don't matter either

DoChenRollingBearing's picture

With all the horror that is going on in Japan, I really do hope they can work it out.  I really have my doubts though, Fukushima being a HUGE PROBLEM...

From a purely selfish standpoint, I hope their bearing companies (mostly in SW Japan, away from Fukushima) can keep their production up to help us better supply Peru...

old naughty's picture

DC,

have your geigher counter ready...check readings on every shipment.

 

chump666's picture

ZH,

Check out the sensex friggin collapsed!

Markets are flippin out

Milton Waddams's picture

The [enter bubblenomics Fed Chairman here] put is an incredible thing.  In times of panic and market dislocation, the Fed infuses its owners with cash in order to finance their acquisition of assets at fire sale prices.  And in recently invoking 13(3) of the FRA [UD], we see that the Fed will trade cash for virtually anything so that the cash can be deployed into deep value situations within panic conditions.  Rigged casino.

Yen Cross's picture

 Gold and Silver look really heavy and WtI sept. futures dipped below 91.50. 

  Here come's the Junks. Instead of learning from people they live in denial.

johnmilan's picture

How do you buy options on the Iraqi exchange?

    I have dec 66 SPY puts

dognamedabu's picture

I think you have to walk into buddies hut and say..I am taking your stock if it reaches X level by July 16. And if you don't like it, remember you have the option on if you live or die. 

HungrySeagull's picture

I had a view of Iraqi stock exchange on Fox some years ago. They had a Rotary telephone, a few note pads, pencil and a modest whiteboard with semi pernament markers on the wall to write, edit or wipe away data as it changed on thier new stock exchange.

 

Something like 15 or so listed that day in the brief presentation if memory serves. Easily serviced in real time without too much difficulty and hardly no tech or other overhead.

Yen Cross's picture

Do I need to answer this? CFD,s  ETF,s Over seas banking?  ,.'..'..,'...

gwar5's picture

Beanie Babies Stock Markets 

250 years from now people will still be talking about all of this the same way we still talk about the Dutch Tulip Mania.

gwar5's picture

This isn't exactly modern and it sure isn't capitalism, at least not the kind Adam Smith would recognize anyway.

Our CBs are just doing the same scam John Law did in France, 1715-20 when he printed a series of notes for the Royal Charter bank, backed by land in America supposedly. Boom to Bust in 5 years when it all unraveled.

He even tried capital controls and banning gold ownership, but didn't last a year. These CBs belong in jail with Bernie.

 

 

disabledvet's picture

"if everyone's doing it it must be ok."

Harlequin001's picture

"if everyone's doing it becomes more difficult to hide from."

dognamedabu's picture

Can anyone give me a bit of background on Tyler? No not the fictional movie dude, the one here that is like a machine that finds all this awesome financial stuff no one else seems to have the balls to talk about. I hate to think I am getting fed this all by a Brad Pitt character. 

Popo's picture

If you were taking hourly jabs at the world's most powerful (and dangerous) cartels, would you put your real identity out there?

augie's picture

Supposedly, he was born in a mental institution. They say he only sleeps one hour a night.

why do you want to know about the tylers? is there mere existence not enough for you?

Orly's picture

His midichlorian readings are off the scale.

dognamedabu's picture

Ha ha I gets you. I do remember their old site. 4 of them right?

Oh well, best to keep the magic going. Just want them to know it is the first place I check in the morning and the last place I check before bed. Total reps for the hard work that they seem to totally enjoy doing. 

 

augie's picture

if you're trying to get in touch with them,

Guide

ads [ at ] zerohedge [ dot ] org - Advertising Inquiries.

abuse [ at ] zerohedge [ dot ] org - Abuse / Infringement Issues

 

MisterAmbassador's picture

You are Tyler.  Tyler is you.

 

"Self-improvement is masturbation. Now, self-destruction..."

gwar5's picture

Click around on the website, there used to be a tab that would let you lurk on the live webcam that's bugged into Bernanke's office.

I think that's where he gets most of his shit.

ProdigyofZen's picture

Tyler runs this site from Argentina. While we are running around like chickens here in the US he is lapping up the 24% inflation in Buenos Aires living it up. He is probably at one of the famed Milonga's right now dancing Tango.

Yen Cross's picture

 Tyler is Chuck Norris incognito, and he lives in Ninja Dojo far, far away!

dognamedabu's picture

Oh wait..There is a paypal donate button I seem to gloss over often. Hmm soon as the dude pays me for that DVD on Ebay, I have $20 with your name on it Tyler ;)

 

'cept that Canada Post strike is going make my feedback rep go to shit.

 

Hey look at that! My first junked on ZH. Now I feel like part of the club. Thanks!

 

 

 

disabledvet's picture

forgot all about that Canada Post strike.

Shineola's picture

Tyler must be like Lassie.  There's probably about eight of them.  

 

My favorite episode is where Bennie falls his dapper looking ass down a mineshaft and Lassie risks her life to catch a rattler and drops it in on him.  That one brought a tear to my eye.    

Mediocritas's picture

Basically, if one ignores all the stocks that actually pay a dividend, the stock markets of the world are all just massive Ponzi schemes, taken upwards by continual inflows of cash from the baby-boom generation pursuing the dream (often mandatory) of building a nest-egg for retirement.

Now, as we know, all it takes to expose any Ponzi scheme is for enough people to cash out. So here they come, the boomers, going into retirement and drawing on that next egg, sending markets inexorably into the gutter compounded by a virtual army of bots that are rather more capable today at running a trend than the bots of old.

Well , that's just a tad inconvenient for the overlords now isn't it? We can't have the world's largest (current) voting group experiencing an elimination of life's savings now can we? So here come the central banks to the rescue with a perma-bid supported by an infinite cash machine, swapping equities onto their books and keeping notional stock prices elevated. Nevermind that every company will end up being effectively nationalized and that all that extra cash in the system will lead to inflation that wipes the boomers out anyway, we'll just bet on the next generations breeding like hell to create enough warm bodies that will then seek to create their own nest-eggs and we can reverse the swap and kick it all down the road. Too easy!

Well, my dear Central Bank Overlords, it seems the problem you have there is that the newer generations appear to have noticed that you've fucked the world up rather badly, and they don't seem all that keen to each have 10 kids just to feed them to the Ponzi-doom machine you've created. Hell, seems like they don't even want to be fed to the machine THEMSELVES! I guess the game is up.

molecool's picture

Awesome mate, and spot on.

Popo's picture

> " Hell, seems like they don't even want to be fed to the machine THEMSELVES!"

 

Give it time.   Planned financial crises have a way of forcing the best of them onto dole.   They may not 'want' to buy in, but they can be forced in through max pain.

 

Harlequin001's picture

'A villein was the most common type of serf in the Middle Ages. Villeins had more rights and higher status than the lowest serf, but were under a number of legal restrictions that differentiated them from freemen. Villeins generally rented small homes, with or without land. As part of the contract with their landlord, they were expected to spend some of their time farming the lord's fields. The rest of their time was spent farming their own land. Like other types of serfs, they were required to provide other services, possibly in addition to paying rent of money or goods. These services could be very onerous. Villeins were tied to the land and could not move away without their lord's consent. However, in other regards, they were free men in the eyes of the law. Villeins were generally able to have their own property, unlike slaves. Villeinage, as opposed to other forms of serfdom, was most common in Western European feudalism, where land ownership had developed from roots in Roman law.

A variety of kinds of villeinage existed in Europe in the Middle Ages. Half-villeins received only half as many strips of land for their own use and owed a full complement of labor to the lord, often forcing them to rent out their services to other serfs to make up for this hardship. Villeinage was not, however, a purely exploitative relationship. In the Middle Ages, land guaranteed sustenance and survival, and being a villein guaranteed access to land. Landlords, even where legally entitled to do so, rarely evicted villeins because of the value of their labour. Villeinage was much preferable to being a vagabond, a slave, or an unlanded labourer.' Wilipedia.

Many will beg for it, ultimately...

 

ZackLo's picture

Hot money chases high yield there is no conspiracy behind that. And the money the fed is printing to pad Europe and when they all dump they're load somewhere around 2013 we'll have hyperinflation Weimar proved that with Mises' call no different bernanke thinks the u.s is different because he saved Japan on the back of the us hot money the correlations don't lie.