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The BoJ Owns 52% Of The Entire Japanese ETF Market , And Now It Wants More
Way back in March, after the BoJ’s equity plunge protection had been exposed for all the world to see, we brought you a hilarious set of proclamations from Haruhiko Kuroda who, you’re reminded, is known for surreal soundbites regarding both the effectiveness of unconventional monetary policy and the omnipotence of central banks.
The BoJ’s $90 billion equity portfolio is actually “not large”, Kuroda explained, before adding this amusing bit of color: “stocks aren’t being lifted by the BoJ’s ETF purchases.” You can evaluate the veracity of that statement for yourself using the following chart from WSJ:
Kuroda's comments came on the heels of a Nikkei piece which contained the following rather eye-opening passages:
The central bank's portfolio has a book value of around 5.7 trillion yen. But soaring share prices have lifted its market value past the 10 trillion yen mark -- nearly 2% of the tally for all Tokyo Stock Exchange shares.
The figure makes the BOJ second only to the Government Pension Investment Fund, whose portfolio boasted a market value of 27 trillion yen as of December's end.
Although the central bank does not disclose details of share-buying operations, it frequently steps into the market and buys 30 billion yen to 40 billion yen worth of stocks when equity prices falter in the morning. Its purchases Tuesday reached 35.2 billion yen, underpinning a market that showed signs of a morning struggle. The bank has carried out 20 such operations so far this year.
The stock portfolio's impact on the BOJ's financial health can no longer be ignored.
The bank's net worth is 2.8 trillion yen, while its stock portfolio is worth twice that in book value, or 250% more in market value. Japanese megabank Mitsubishi UFJ Financial Group has a net worth of 14 trillion yen, with its stock portfolio amounting to only 5 trillion yen in market value.
The central bank must book losses when stock prices suffer extraordinarily sharp drops, since its financial health could hurt confidence in the Japanese currency.
Right. In other words: you can’t mark your equity book “held to maturity.”
The problem for the BoJ is that it’s running out of bonds to buy. Literally. Recall our assessment from last month in which we highlighted comments from BofAML and from the IMF, both of which indicate that Kuroda will soon find that the central bank has hit its limit in terms of finding willing sellers and in terms of how far the BoJ can push the QE envelope.
As we said in Septemeber, in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, "suddenly" pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan's QQE going.
Indeed, the IMF notes that in Japan, where there is a limited securitization market, the only "high quality collateral" assets are JGBs, and as a result of the large scale JGB purchases by the JGB, "a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity."
For those surprised by the IMF's stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:
So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.
So with the list of willing sellers dwindling and market liquidity evaporating (and you don't want that because it sets the stage for harrowing VaR shocks which, if you're holding a massive book of bonds, can lead to outsized losses - on paper anyway), the BoJ will need to turn increasingly to stocks, and as Bloomberg reports, owning half the ETF market may no longer be enough for Kuroda. Here's more:
Japan’s central bank already owns more than half of the nation’s market for exchange-traded stock funds, and that might just be the start.
The Bank of Japan will boost stimulus on Friday, according to 16 of 36 economists in Bloomberg’s latest survey, with 12 saying it would do so by increasing its annual ETF-buying budget. With 3 trillion yen ($25 billion) a year in existing firepower, the BOJ has accumulated an ETF stash that accounted for 52 percent of the entire market at the end of September, figures from Tokyo’s stock exchange show.
The Topix index is up 21 percent since the central bank unexpectedly tripled its ETF budget almost a year ago, and Citigroup Global Markets Japan Inc.’s Tsutomu Fujita says there’s room for them to triple it again. For Amundi Japan Ltd., expanding the program would do more harm than good.
“At a fundamental level, I don’t support the idea of central banks buying ETFs or equities,” said Masaru Hamasaki, head of the investment information department at Amundi Japan. “Unlike bonds, equities never redeem. That means they will have to be sold at some point, which creates market risk.”
Right. Once again, you can't mark your equity book "held to maturity" and as an aside, it's not clear how the BoJ intends to exit these positions without precipitating a crash. In any event, Kuroda's protestations notwithstanding, the BoJ is certainly propping up the equity market...
The BOJ tends to enter the market on days where stocks decline in the morning, and has spent more than 80 percent of its allowance for this year.
“The BOJ’s ETF buying has an impact on investor psychology," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc. and a former central-bank official, who expects policy makers to announce an increase in purchases of ETFs, sovereign debt and real-estate investment trusts on Friday.
...and because the central bank has literally cornered the JGB market, expanding the ETF portfolio is the only option...
“Buying bonds is no longer possible, but they still have plenty of scope to increase ETFs purchases to, say, 10 trillion yen from the current 3 trillion yen,” said Fujita, the vice chairman of Citigroup Global Markets Japan, who expects the central bank to ease by January.
...unless of course the central bank breaks down and starts buying individual stocks...
Similar to 2002, "they could also buy the underlying stocks too.”
As Bloomberg goes on to note, buying individual issues would allow the BoJ to effectively control corporate management teams on the way to dictating decisions about wage hikes and capex. In other words, when Abenomics fails, the BoJ will simply take over the boardroom and mandate higher pay in an effort to fix this:
Or, as Izumi Devalier, HSBC’s Hong Kong-based economist puts it, "if the macro didn’t work, maybe you do it on a super micro level."
Yes, "maybe" you do, but this amounts to an all-out effort to centrally plan the economy and like all such efforts, it will end in tears and the extent of the sorrow will be directly proportionate to how far the state has gone in terms of trying to dictate macro outcomes via micromanagement.
At some point, this charade has to end. There will be no more monetizable assets and unless the government intends to simply issue one liability (a bond) and buy it with another liability that they also print (fiat money) for the sheer sake of keeping the ponzi scheme alive (i.e. issuing debt for the sole purpose of perpetuating QE), "failed state" status is right around the corner.
We close with two quotes and one searing image.
Paul Krugman: "Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous."
Haruhiko Kuroda: "I trust that many of you are familiar with the story of Peter Pan, in which it says, 'the moment you doubt whether you can fly, you cease forever to be able to do it.' Yes, what we need is a positive attitude and conviction."
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http://twitter.com/BorisAlatovkrap
Stamina of Abenomic is not for underestimation:
http://www.youtube.com/watch?v=xiCZ6Ac7NzY
This is awesome.
Seriously, what is it called when the Government owns and controls the majority of shares of public companies.
Socialism?
Communism?
Fascism?
Dictatorship?
Because it sure as shit isn't free market capitalism anymore.
Alex, can I have all of the above for $500 please..........it's the politicians attempt to right the ship by controlling everything, just like Russia during it's USSR days. Trouble is it never works and sets in motion the wheels of change for the future.
Nothing like smell of napalm in morning!
Which begs the question, how much of the NYSE ETF share does the Fed own?
Marx has returned.
What happens when they get to 100%?
Will corporates finally get access to the printing press via rights issues?
Can nobody over there see what's coming?
That is what I was wondering. Can they legally (or not) buy stocks or ETFs in US markets, or European etc
State is end, you are means.
Yes, end of State.
One could argue that it really all begins with the initiation of QE, which is by its very nature diametrically opposed to actual free market capitalism. All things break from that point on.
Hence the term 'Slippery Slope.' Governments around the world pronounce it to be a safe method of 'supporting' economic activity, which is great as long as you ignore all the evidence of prior history.
Yep. Socialism made Easy. I got to get back to Harajuku and Kabukicho one last time before everyone mutates from the radiation or goes kamakazi serf.
No matter which way he leans.
Who knows these days. it could be both ways.
Love that photo.
in case of infidelity, break glass !!!
Kamikaze economic...
Considering teh US Fed bought up the evidence of massive fraud when it bought mortgage derivatives, I wonder if the Japanese ETF market is also mostly unbacked fraud that is being bought up.
To ask is to answer.
Corroda should save the third arrow for himself.
This has become nationalization of the private sector through money printing. When the gov owns everything, it doesn't take long to run completely amuck. Central bankers have executed a marxist take over without a shot fired, and its happening everywhere.
No. No. NO.
This is NOT nationalization. It's privatization of public interests. It's fucking fascism. This marxist stuff is a smokescreen.
My fucking hell, why can't people see that?
The path to full retard goes by many names.
But in the U.S it's not politically correct to use the term 'Retard.'
So instead they refer to it as 'Exceptionalism.'
Central banks are the gov. Some people like to think they are private, and by strict definition they are, but not in practice. Even Bernanke said his office felt like it was run by the Dept. of State. The Fed is entirely political. Perhaps with the exception of Volcker who at least tried, there has never been an independent fed. Once the central bankers have played this out, you will start to see gov. running their new nationalized companies, dictating corporate decisions, and mandating even more odd social engineering. Production and profit becomes secondary to political concerns. The GM debacle was just a glimpse. Intense regulation will keep start ups from competing with the big nationalized corporations.
+100. Well Said. It IS a take over.
All planned. All by design.
Absolutely. By government employees. What could possibly go wrong?
the fed will own it all too some day. at least the boj didn't blow up the N225 to 150%+ of the ATH like the bernank and yellen did the s&p bitchez. of course kuroda did help with that too so i guess he's just as big a maggot as anyone.
?
I ask you: what would it take, what data, what sort of logical proof - to convince Paul Krugman that HE has been wrong, and is in fact helping to make things worse.
I tend to believe that he is not evil, that he really believes his own arguments, but that he is "paradigm blind" and simply can not see that the limits of his vision are not the limits of the world.
I'm not quite sure his grasp of semantic logic is what it could be either. The man deals in ad hominem so much his polemical skills, whatever they once were, have degenerated to Teh Finn-like levels of unargued assertions and name calling.
"I ask you: what would it take, what data, what sort of logical proof - to convince Paul Krugman that HE has been wrong, and is in fact helping to make things worse."
I would say the Earth blowing up is what would start to make him think that it wasn't a good idea.
Earth blowing up is Krugmans wet dream.
Think of all the jobs it would create! Instant consumer demand! GDP boost to X100! Government would have to borrow to make the repairs of course....but we would grow our way out of it!
There is no possible way to remove his head from his ass, they have become one.
North Korean economics. We already know how that ends up.
The central banks own everything.
You can bet our Federal Reserve is doing the same thing.
First they try it in Japan and then the US.
Need the "Mission Accomplished" banner in the background.
Funny but true. All roads eventually lead toward a North Korean style Government.
Which is why the framers of the U.S. constitution wrote in as its foundation that the Government was created by the people for the people. And the people of the United States were given both the right and the means (free speech and the right to bear arms) to overthrow said government if it ceased to function in that manner.
Of course the Patriot act has negated a huge chunk of the above but then that is in itself 'unconstitutional', which is why it will ultimately be nullified (one can dream right).
The clock will not run backwards. What comes next is easyly predicted. Sorry.
Alexander Fraser Tytler's exact full quote: 10/15/1747
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:
From bondage to spiritual faith;
From spiritual faith to great courage;
From courage to liberty;
From liberty to abundance;
From abundance to complacency;
From complacency to apathy;
From apathy to dependence; <<<<<<<<<<<<<< As a society, we are here.
From dependence back into bondage.
We all know what owning more than 50% means. They want to own us through paper money reliance. A really old book told us this was going to happen. Soon they'll be building a temple in Israel for one dude to rule. Who's side will you be on?
You can’t mark your equity book “held to maturity.”
Why would you want to do that in a negative interest rate world?
Much better to hold the asset on the central bank books at cost, that way you never have to recognize the losses. This is of course, unless the company that the stock is for goes bakrupt and the shares canceled.
The other problem is that if there is a 'run on the central bank' by its member banks, and the central bank has to sell the shares it holds at a loss to meet redemptions(the loss would have to be recognized at that time on the shares sold); there by causing more of a panic and firesale as other banks try to call back their contribution to the equity at teh central bank. (I am talking about the model we have in the USA, where the federal reserve gets it equity from its member banks that it uses to operate and borrow against.)
Subalashi des
Watch Japan closely, they are the template to which EU and the U.S. will follow. When the whole thing blows we'll be in the same boat, the governments will have bought all the debt and a good portion of stocks. Then, at the same time the central banks will forgive their respective debts, wipe it off their books and agree on some type of new deal that will be just a bigger bunch of bullshit.
Just like US treasuries being dumped by the Chinese and Russians are being bought up by the Fed through it's member banks and then taken off balance sheet.
Yes. Japan has already led us all through the gates of hell.
In addition to the lost decades, the other Elephant in the Room is the meltdown at the Fukushima Daiichi nuclear reactors, the disaster that keeps on giving (see: www.world-nuclear.org/info/safety-and-security/safety-of-plants/fukushima-accident), which will require $hundreds of billions to clean up. PM ("three arrows") Abe is hoping to distract the Japanese population from the immense domestic problems confronting Japan- continuing economic stagnation/decline and ongoing disaster at Fukushima, by starting a war with China, which will make WWII look like a Sun afternoon BBQ.
https://www.youtube.com/watch?v=IbDqiZoZzUM
Soon central banks will own everything fiat. Let them have it. We don't have to use their system, there are plenty of useless rocks out there we can trade amongst ourselves, for real products. Imagine a world where those fucking pigs starve to death because their trillions of digits on a computer doesn't buy them food that we produce.
We are just as much the problem for using thier fake fucking system, a belief in fairy fucking tales that believes a 5" x 7" piece of paper is worth the same as a butchered animal that will feed a family through the winter. It would be giving up what TV tells you is 'luxury' but that is also your mindset believing this shit, just like the piece of paper faith.
Maybe the Hudderites really aren't that stupid after all.
Missing a key point though. They are using 'free' money to buy up real assets knowing full well that said free money will never have to be paid back.
The con is on. And has been for some time.
Does this play in anyone elses head when they read these articles?
Unspeakably bonkers.
De facto socialism.
The BOJ could always buy gold. This would be less risky and it could put some money it my pocket which might result in me buying a new imported Japanese car. This would improve Japan's balance of trade.
Translation; when it goes tits up, nobody is getting anything.
At some point here market forces will become market farces.
Wish away the radiation to.
This was a great piece Tyler. This particular paragraph stood out.
"At some point, this charade has to end. There will be no more monetizable assets and unless the government intends to simply issue one liability (a bond) and buy it with another liability that they also print (fiat money) for the sheer sake of keeping the ponzi scheme alive (i.e. issuing debt for the sole purpose of perpetuating QE), "failed state" status is right around the corner."
I wonder how disruptive that would be for JGB yields, for current JGB holders? The Japanese parliament did pass a law over the last year or two allowing the BoJ to print Yen amounts over the the outstanding bond/JGB issuance, but that doesn't do much good if there's no collateral to purchase. Japan is so FUBAR, and they're going to take everyone else down with them.
I wonder if it was at some point illegal for the BoJ to buy stocks, just like it is (officially) for the Fed.
Rational thinking has been banished from Central Bankerhood, what with negative interest rates actually a thing now, so might as well just decide to print up all the bonds they need to buy. It's not like anyone is expecting them to do anything that makes sense...
FED owns 90% of stocks. Does it matter if you put a bunch of funds and commercial banks in between?
It's like USA democracy argument. "Look! You have one person making all the decisions, this is not democratic. You should have institutions that make decisions while running the election theatre - that's democratic!"
Rebuilding of the feudal empire
This is like hitting yourself with a hammer to stop the pain.
They're trapped, plain and simple. No way out but to hope the music never stops.
http://pebblewriter.com/japans-equity-trap/
Damn, who didn't see that one coming, not me.
"I won't come in your mouth"
A completely meaningless stat, 52% of Japan etf, what % of equities are etf? 5%?