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Bank Of Japan Machinations Crash Into Reality

testosteronepit's picture




 

The Japanese stock market has become a case study of central-bank manipulations, and of what happens eventually as reality cannot be eliminated forever.

On Thursday, the Nikkei, after a horrific 800-point or 6% dive on a staircase to hell, or to 12,416, whichever came first, recovered a few hundred points, then climbed back down that staircase and ended the day at 12,445, the lowest close since April 3, down 844 points for the day, the second largest swoon so far in 2013.

The largest swoon this year? May 23, a 1,460-point crash, or 9.2%, from its intraday peak (after a 300-point jump that morning) of 15,943 – the highest most euphoric point since December 2008. Now the Nikkei is down 21.9% from that peak, and in bear market territory. Both the Nikkei and the Topix dropped below the 100-day moving average during the day, which in itself triggered more selling, as these technical indicators, and the buy-sell behavior they engender, become self-fulfilling prophecies (for a while), not only on the way up, but also on the way down – their raison d’être; otherwise they’d be utterly useless.

It took the Nikkei 50 days – from April 3 to May 23 – to make it up that far, and just 20 days to come back down. Up by escalator, down by elevator (with ear-popping speed).  

This is what happens when a stock market gets inflated by a central bank: promises of boundless money-printing attract the hot money that causes values to balloon to ridiculous highs in the shortest time. Then something happens, some silly event, the recognition that enough money has been made, a rumor that some big hedge fund is bailing out, a disappointing statement by the Bank of Japan, something... and some of the hot money suddenly has had enough, tries to take profits, tries to bail out, just when there are not many euphoric buyers left, and what you hear is a giant hissing sound. And what you get is capital destruction and wealth transfer.

Thank goodness, for the Bank of Japan, there is nothing like a good stock-market crash to prop up the otherwise wilting market for Japanese Government bonds. They’ve been an awful investment recently: the 10-year JGB has been yielding below 1% even though the BOJ promised to create 2% inflation. The official plan is to hand JGB buyers a loss on an inflation-adjusted basis. So investors have been bailing out of JGBs while the BOJ has been gobbling them up through its massive bond-buying program. Yields have been jumping up and down in the most tumultuous manner, rising for the 10-year JGB from the freaky 0.315% low of April 5 to briefly kissing 1% on May 2, and panicky bondholders have been pulling out their hair along the way.

Since then, JGBs have “stabilized” somewhat, with yields retreating below 0.9%. But during yesterday’s stock market massacre, these despicable JGBs suddenly seemed like a pretty good deal again, given the choice between losing money fast in stocks and losing money more slowly in JGBs. In response, yields on the 10-year JGB briefly plunged from 0.88% to 0.80%, only to rise back to 0.86%.

In support of its machinations, the BOJ has stated repeatedly and explicitly that it is trying to inflate the stock market to create the "wealth effect" – that ephemeral and treacherous impetus for people to spend money they see on a computer screen but haven’t realized yet and haven’t paid their taxes on yet. But on average, they actually can’t spend the money they see on that screen because they’d have to sell to do so, and pull their money out of the market. It would cause a crash. And annihilate that beautiful wealth effect.

Instead, central banks use the wealth effect to lure consumers with a vision of wealth so that they’d spend their savings, or spend with their credit cards. And then, when the market does crash, consumers are left holding the bag: the vision of wealth has dematerialized, their savings have been decimated, and credit card bills have piled up. An insidious central-bank strategy.

But that’s secondary for the BOJ. Its primary concern is the enormous government bond market – and the banks, retirement funds, and other institutions that own a big portion of these crappy bonds. They're  the lifeblood of the Japanese economy. And when push comes to shove, the BOJ lets stocks plunge in order to support bonds – as it has done on numerous occasions.

It’s hard to blame the BOJ. There are no more good options available for Japan. The economy has become physically dependent on out-of-control government deficit spending – with half of the spending being borrowed money! The debt, now over 200% of GDP, is so huge and growing so rapidly that reasonable solutions no longer apply. But reality cannot be pushed out forever. Someone eventually MUST pay for it all: the bondholders, the taxpayers, or all Japanese (via run-away inflation).

The one thing we know from Abenomics, and from the policies of all prior governments: they’ll try to push the day of reckoning out as far as possible, hopefully beyond their time in politics, and hopefully with enough warning to allow the elite to protect itself from the fallout. The BOJ’s job is to make that possible.

Abenomics has its detractors – even in unexpected places – and Prime Minister Shinzo Abe must be experiencing some interesting pillow talk. His wife has attacked one of the major components of his economic policies, the formerly omnipotent nuclear power industry that he is trying to restore to its former glory. Read.... Akie Abe, His “Anti-Nuclear” Wife 

 

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Fri, 06/14/2013 - 06:44 | 3657499 123dobryden
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yesterday at midnight, 400 police officers raided an PM office in Czech republic, arrested several MPs, PM's secretary and mistress in one person, former head of military inteligence, former deputy of military inteligence, confictated 150mil czech crowns /7mUSD/ in cash and....here we go, several kilos of GOLD....rats are already prepared  to jump the ship.....among other charges is that PMs secretary ordered  military inteligence to spy on PMs wife as he announced 3 days ago hes gonna devorce and also that he trust his current pussy unconditionaly....

Fri, 06/14/2013 - 04:43 | 3657444 andrewp111
andrewp111's picture

It is coming to the end. Japan needs to use the Nuclear Option - Trillion Yen coins.

Thu, 06/13/2013 - 20:44 | 3656632 thestarl
thestarl's picture

And their now running current account deficits.

Well at least they still make good reliable cars.

Thu, 06/13/2013 - 20:32 | 3656580 IPA
IPA's picture

All your base are belong to us 

You have no chance to survive make your time 

Ha ha ha

Thu, 06/13/2013 - 17:48 | 3655890 falak pema
falak pema's picture

casino mahjong! 

Thu, 06/13/2013 - 17:47 | 3655883 dreadnaught
dreadnaught's picture

i wonder wtf is holding this house of cards together? Some unforseen event out of 'their' control will happen and it will all collapse-to bad we dont have the balls to go bankrupt like Iceland did-Fook the Bankers!

Thu, 06/13/2013 - 22:32 | 3656965 Ned Zeppelin
Ned Zeppelin's picture

Someone recently pointed out that if the collapse is imminent, the collapse will be outlawed, at threat of gunpoint. This is correct. The only thing going on is the elites gathering bux from the foolish who ride the roller coaster. Whose every hill and valley is controlled by the CBs and their Sith Lords the TBTFs.

Nuff said.

Thu, 06/13/2013 - 16:46 | 3655571 pagan
pagan's picture

I don't understand why it is so hard for the BOJ to push the yen lower?

It keeps popping up.

Fri, 06/14/2013 - 04:45 | 3657445 andrewp111
andrewp111's picture

There must be too much demand for Yen by speculators who borrow in Yen to buy US Stocks and Eurotrash bonds.

Thu, 06/13/2013 - 16:37 | 3655540 Peter Pan
Peter Pan's picture

The other day I commented that someone should send a bunch of tulips to the Bank of Japan to remind them of how these manipulations end. It appears bunches of tulips were sent to the shareholders.

Thu, 06/13/2013 - 16:14 | 3655407 mt paul
mt paul's picture

economic sushi ..

Thu, 06/13/2013 - 15:51 | 3655280 Clowns on Acid
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Well the diff of course is that the JPY is not a "reserve" currency, but is a great "carry trade" currency. Thus the Nikkei will be subject to the whims and fears of the carry trade specs.

The S&P is subject to the whims and fears of the Fed and the maladjusted that are in command there. 

Thu, 06/13/2013 - 15:50 | 3655271 Mototard at Large
Mototard at Large's picture

It would be fun to sit in on the daily executuve meeteing at the Japanese Ministry of Finance or the Central Bank tomorrow.  Wonder what they would be talking about?

Thu, 06/13/2013 - 22:17 | 3656915 kchrisc
kchrisc's picture

How does one say "Oh shit!" in Japanese?!

Thu, 06/13/2013 - 16:00 | 3655327 Clowns on Acid
Clowns on Acid's picture

" Wonder what they would be talking about?" Easy answer.... print moar but don't announce it. Only those with access to NSA records will know and they won't tell anybody, but they will buy more stawks !

Thu, 06/13/2013 - 15:20 | 3655085 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Q:  What happens when you add Japan and eventually the U.S. to the PIIGS?

A:  JIG IS UP !

Thu, 06/13/2013 - 15:17 | 3655060 0b1knob
0b1knob's picture

Never forget that the economy is MUCH larger than the central bank or the government.    The whole idea of Keynesian policy is sort of like an elephant  trainer with a bull hook or electric prod.    The ususally gentle and peaceful elephant is easily moved around by its own fear and sense of pain.   Until one day it turns on its trainer.   It only turns on its trainer once.

 

http://www.blinkx.com/watch-video/traveling-circus-elephant-kills-trainer/ItKgqFgugm2lfdgaBRtm5w

 

 

Thu, 06/13/2013 - 15:59 | 3655320 NotApplicable
NotApplicable's picture

Not any more it isn't, as the entire economy has been "financialized." When corps do a better business selling paper to insurance companies, et al., than investing in their own enterprises... well, it's pretty much game over at that point. All they're doing is consuming their capital for a few basis points until eventually they are NOTHING but a cash flush entity.

Thu, 06/13/2013 - 15:22 | 3655096 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

What does my mother in-law have to do with this?

Thu, 06/13/2013 - 15:09 | 3654987 Dareconomics
Dareconomics's picture

As the red line in the chart indicates, the Nikkei has completed a round trip from 12,500 at the onset of 2-2-2 to 16,000 during the height of exuberance in May back down to 12,500 as investors realize that Japan is still Japan.  The country is a victim of both a demographic disaster and the Cantillon Effect.  The country cannot be awoken from its torpor with money printing or any other intervention, because it is not sleeping.  Japan is dying.

 

http://dareconomics.wordpress.com/2013/06/13/around-the-globe-06-13-2013/

Thu, 06/13/2013 - 19:52 | 3656453 RockyRacoon
RockyRacoon's picture

Owning stocks makes some sense in the traditional view, but why would anyone even want to own a government bond?   Neither makes sense in manipulated markets, but bonds make the least sense of all.  I understand arbitrage and all that, but the analogy of pennies in front of a steamroller is more than apt.  Ulcers can be had for a lot less.

Fri, 06/14/2013 - 07:29 | 3657547 KidHorn
KidHorn's picture

You're right and the result is people don't own government bonds. Central banks, pension funds and banks do. The latter two frequently have no choice.

Fri, 06/14/2013 - 21:36 | 3660038 RockyRacoon
RockyRacoon's picture

Know what?  That makes my point even more valid.  It's just a mutual admiration society.   Hey!  You buy our bonds and we'll buy yours.  Deal?  If normal people who can make rational decisions eschew bonds, why don't those who are presumably smarter do it?

Thu, 06/13/2013 - 14:42 | 3654846 BraveSirRobin
BraveSirRobin's picture

Abe looks nothing like Goh-zee-rah on TV, but he seems to be having a similar effect on Japan.

Thu, 06/13/2013 - 20:46 | 3656641 Buck Johnson
Buck Johnson's picture

We are going to have another Asian currency crisis real soon.  Japan having such a bad market won't just stay with Japan, it is the third largest in the world.  And when they get sick we get sick also.

Thu, 06/13/2013 - 23:35 | 3657124 Non Passaran
Non Passaran's picture

Last time ('97) China kind of missed out on that one. Perhaps they can do better this time?

Today I saw a blog post speculating about the possibility of financial crisis in East Asia. If I had to speculate I'd say China.

Fri, 06/14/2013 - 07:33 | 3657550 KidHorn
KidHorn's picture

I agree. China has a ton of bad loans sitting on bank balance sheets. Their banks are broke, There is a ton of liquidity entering the country from foreign central bank printing. The problem is the liquidity needs to go into the banks and it's not. To save the banks, the gov't would need to print, but if they do this, they'll have out of control inflation.

Thu, 06/13/2013 - 22:47 | 3657006 FinalCollapse
FinalCollapse's picture

There is going to be nuclear winter in his bed and poor Abe will need to go to restroom again...

Thu, 06/13/2013 - 14:46 | 3654840 BraveSirRobin
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Or maybe he's more like Mothra.

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