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