CLSA: "The Bank Of Japan Has Nationalized The Japanese Stock Market"

Tyler Durden's picture

Following the recent announcement by the BOJ that it would double its ETF purchases to ¥6 trillion, or $58 billion, up from the current ¥3.3 trillion, which is the equivalent to the Fed purchasing $580 billion in ETFs over the next two years, we noted that according to a Bloomberg analysis this would make the Bank of Japan the top shareholder of 55 companies by the end of 2017.

 

It should, therefore, come as no surprise that as CLSA's NIcholas Smith wrote in a research report, the "BOJ is nationalizing the stock market" because that is precisely what it is doing with every incremental intervention in the stock market.

Of note in Smith's note, first reported by CNBC, is that the BOJ's purchases are focused largely on funds tracking the Nikkei 225 index, estimating that more than half of the BOJ's ETF buying was likely in Nikkei-tied funds."That was particularly distorting because that gauge was "a Flintstones index from an abacus age," due to its arbitrary inclusions." He noted that Uniqlo owner Fast Retailing had the largest weighting in the index, but that was primarily due to its high share price after avoiding any stock splits since April 2002. He estimated that BOJ buying of Nikkei-tied ETFs worked out to more than 16 percent of the stock's free float each year. By comparison, Toyota Motor had the biggest market capitalization of any Japan stock, but was only ranked 15th by weight in the Nikkei index.

"If it seems strange that the BOJ is hamstringing the price discovery mechanism of the Japanese stock market by partially nationalizing it, it is all the stranger that it chooses to do so by substantially skewing its buying towards such a distorting index. The arbitrary decisions of the Nikkei committee get to choose the destination of trillions of yen of BOJ – and hence government - money."

Smith then laments an issue that has especially plagued bond buyers in Europe over the past few months: the CLSA analyst expects that as long as the BOJ continued to buy ETFs, the Japanese market's performance would become increasingly a function of liquidity in the central bank's buying basket. Considering that the BOJ will have to intervene far more aggressively in both the bond and stock market in the coming months to push the Yen weaker, liquidity is only set to get worse.

CLSA wasn't the only one to lament the nationalization of the Japanese market. In a Friday note, Deutsche Bank said that the BOJ's purchases of Japan real-estate investment trusts (J-REITs) had also lost market-based "price discovery."

Quoted by CNBC, they said that on August 18, the BOJ purchased around 1.2 billion yen worth of J-REITs for a total of around 61.2 billion yen worth so far this year and 330 billion yen worth since October of 2010. Last week's BOJ action caused the TSE REIT index to drop sharply in the morning session then surge later in the afternoon, the report said.  Because the J-REIT market is so small, the BOJ's purchases have an even stronger tendency to distort the market than the central bank's ETF purchases, Deutsche Bank said.

"While real estate majors are trading at more than 30 percent discounts to net asset value, their price levels are exactly opposite those of J-REITs, which are at premiums of above 30 percent," Deutsche Bank said, noting that both sectors should be tied to Japan's real-estate market.

"The elimination of the price discovery function leads to lost buying opportunities for investors and ultimately weakens the investment appetite," the report said, calling it a "serious error" by the BOJ.

Finally, Reuters summarizes these widespread fears of central bank incursion into the stock market, warning that the "Bank of Japan's near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy."

The BOJ's buying spree will make it harder for investors to sift good companies from bad, and raises a host of other problems including misallocating capital, making equities trading more speculative and reducing incentives for companies to meet shareholder needs, analysts say.

 

More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB) market and distorting interest rates.

"The increased BOJ purchasing provides a very favorable demand environment for listed equities," said Michael Kretschmer, chief investment officer at Pelargos Capital in the Hague. "Nevertheless, in the long run we strongly doubt these type of monetary gimmicks aimed at price setting of risk assets can have a sustained positive impact on economic growth."

In retrospect, what the BOJ is doing is not new: it is merely the latest act of desperation in a process that stretches over 30 years:

Some liken the increased purchases by the BOJ - the only central bank in the world that buys stocks at the moment - to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble.

Actually, one can add the SNB to the list of banks that are open about their stock purchases. As for central banks, such as the Fed which transacts in the equity market via a very "close" relationship between NY Fed and Citadel, they are for now ignored.

As for Japan, "the market is driven completely by the BOJ's buying rather than views on each companies' earnings," said a fund manager at a Japanese asset management firm.

This means that fundamental data and news are now completely ignored: all that matters - as has been the case for years in the US - is central bank intervention, either direct or indirect.

Some worry the stock market could start to resemble the bond market, where the BOJ's purchases - about 110-120 trillion yen annually - have made traders fixate on its bond buying and pay scant attention to economic data.

 

The BOJ's tactics "could weaken the market's function in the long run," said Keita Matsumoto, head of investor sales at Citigroup Global Markets Japan. "I'm worried that could lead to a 'JGB-ification' of stocks."

Yet what is obvious to all but the BOJ is that the good times will not last, and is why some are already casting glances at the exit signs: "The rise in share prices may seem desirable but it causes harm as well," said Shingo Ide, chief equity strategist at NLI Research Institute. "Even if companies need to improve their management, shareholders may not take them seriously if share prices are not falling."

The endgame, when it strikes, will hardly be a surprise: a quick historical lesson of what happens when the government nationalizes all capital markets, if one can even call them that, look at what happened with the USSR. For now, however, the money printers are spinning and "one has to dance."

Finally, one can probably absolve Kuroda of his sins - after all he is merely following orders of bankers from the private sector (recall that the BOJ launched NIPR following "peer pressure" at Davos) - by admitting that what the BOJ is doing is no different from the creeping capital markets nationalization that all other central banks around the globe have unleashed. Their redemption? They are doing it "for the people."

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wildbad's picture

there is just no news anymore.  everything is meaningless.  there are no boundaries, no rules and noone following them.

VinceFostersGhost's picture

 

 

Nationalized The Japanese Stock Market

 

Pretty much.....we have too.

DeadFred's picture

The author is pretty slow on the uptake it seems.

kliguy38's picture

Ahh don't worry bout it......you'll git outta da door before its too late......that door is right there and ya gotz your hand on the knob, right?....you'll have a nice warning......just remember there are about 50 million others with the same idea so it might get crowded

SoilMyselfRotten's picture

If they are being purchased in the name of the country, it's natural end is fascism. On the other hand, if the BOJ represents Japan as much as the Fed represents the US, i suspect they are stealing the market, not nationalizing it.

Bush Baby's picture

We will too if haven't already

That's why there is such a big push to Globalism

christiangustafson's picture

Japan will hit the wall soon enough, and Japan's population will decline, but at least Japan will remain Japanese.

acommenter's picture

Your avatar is disturbingly nice!  +<infinity>

Dg4884's picture

I forgot what I was going to say.

Leveraged Algorithm's picture

Wow - just can't get past the ass....  What is Japan doing...

omniversling's picture

Is she wearing a thong? I'm looking very hard but I cant see it...

 

GunnerySgtHartman's picture

As Reagan said, "The more the plans fail, the more the planners plan."  Central planning has NEVER worked and will NEVER work, but the planners will never be convinced of it because they are so much smarter than the rest of us (or so they think).

ramgold2206's picture

come on guys.. you know the drill..... moar stawks

 

http://ramgold.ilp24.com/18664

spanish inquisition's picture

Artificially high share prices allow Japanese companies to hide massive losses to save face.

Racer's picture

They are not doing it for the people. But for the 0.0000001% and the richest of the richest

Aghast in Midlothian's picture

Exactly.  What if the goal is Communism, or some varient thereof?  What better way to get there than by nationalizing the equity markets, along the way rewarding (buying) companies that do your bidding.  

GunnerySgtHartman's picture

What if the goal is Communism, or some varient thereof?

The goal is control by any means necessary whether it be through financial, military, or some other means.  Call it Communism, socialism, fascism, cronyism, whatever you want; the name is essentially irrelevant.  Freedom and liberty?  Quaint, antiquated ideas to TPTB.

ebworthen's picture

Buying stocks does not "grease the economy"; the markets are not the economy.

It's that kind of thinking that allowed the rise of flying monkey economists and the scourge of Central Banking.

 

Reichstag Fire Dept.'s picture

Nationalize the Japanese Stock Market? ...another way of saying that is Privatize the Stock Market. 

Since Japan is a leading indicator of the direction of other "less advanced" Central Banks, one can only assume this will happen everywhere else too.

Question: What happens when the Stock Markets are private and then all the debt in the world is defaulted upon?

withglee's picture

Question: What happens when the Stock Markets are private and then all the debt in the world is defaulted upon?

Nothing if all the trades are in stocks.

  • Stocks say: I want to make a trade over time and space ... join me to help "us" make it. Nobody trusts me to keep my word and deliver.
  • Bonds say: I want to make a trade over time and space ... and my word is my bond. I always deliver and my history proves it (or I can counterfeit ... i.e. rollover my debt indefinitely ... so it looks like my word is my bond).
  • Retained earnings says: Screw you all ... I'll do it myself. It may take a little longer but it's very difficult to tip over my apple cart.
  • Hermitage says: Screw you all ... I'm tired of playing the game.
  • Job seeking says: I'm not in the game. I don't even know it is a game.
  • Government job seeking says: I know a better, safer way to play the game.
  • Banking says: I know how to take tribute on everything everybody does and manipulate them with my farming operation called the business cycle. I own everyone but those pests, the hermits.
  • Education says: You need my certificate to play the game.
  • Health care says: If you take this pill I can serve you the rest of your life. If you don't, I can't.

What's not to love about life in the here and now?

  • Religion says: I've got the inside track on the "after the here and now". But you need to pay me dues and behave as I guide you. Onward christian soldiers.
NEOSERF's picture

 "Even if companies need to improve their management, shareholders may not take them seriously if share prices are not falling."

 

Why would a company do anything but milk the current operations, issue debt and stock that will be bought up immediately by the Hoover BOJ and buy their stock back creating a virtuous loop?  At some point they could shut the lights off and keep issuing debt and the BOJ with no oversight into what they are buying wouldn't know.  

UpTo11's picture

Central Banks are no longer manipulating markets, they own them.  Karl had no idea how easy it could be.

E.Shackle.Ton's picture

"Some liken the increased purchases by the BOJ - the only central bank in the world that buys stocks at the moment...."

Not  likely.

Atomizer's picture

The lost decade pushing 23 years. I can't stop laughing. Nationalize the stock market? This is comedy gold. It's called stagflation folks.

Economic stagnation in Japan

 

Atomizer's picture

You fucks came into United States of America to buy up properly. Then your ass was handed too you. Chinese are doing the same thing. What bank did you sink all your money into? 

Japanese economic model that have undergone major changes include the traditional life-long employment system, the "iron triangle" of close and cooperative linkages between the government, corporate governance and the banking system, the keiretsu system, the main bank system, the bank-dominated financial system, and the leadership of the Ministry of Finance and Ministry of Trade and Industry in regulating and directing the economy

Lady Jessica's picture

Someone's been reading Princes of the Yen

yogibear's picture

To avoid a depression from stocks crashing and keep assets going higher they'll impoverish the rest.

starman's picture

Nationalized = socialism 

PrometeyBezkrilov's picture

So, would you rather have it partially belonging to you and your neighbor or entirely to the banking cartel?

dttmei's picture

If everyone is doing it, and the central bankers are aligned with the private money, who is left to burst the bubble?  

J J Pettigrew's picture

Japan is 8 years ahead of the US...

they went to zirp in 2000...we went in 2008

we are following their failure lead step for step...

And our markets have low volatility.....at the highs....

managed market characteristics

 

withglee's picture

The Bank of Japan's near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy.

This is like playing the game of Monopoly where one of the players can just reach into the bank any time they want. It's not a fun game. Why would anyone play?

withglee's picture

this would make the Bank of Japan the top shareholder of 55 companies by the end of 2017.

See. I told your there was no difference between capitalism and communism.

gaoptimize's picture

I'd like someone to tell me the difference between  Gov owning the stock market and Gov owning the industries the equity stands for.  Not communism - fascism.  I didn't vote you down.

withglee's picture

I see little difference ... except control is a little more difficult if you're just a stock holder. What is the difference between fascism, communism, and capitalism? I see none effectively. They're just degrees of the same concepts with the controllers hidden behind different doors.

Now "traderism"? I see that as a totally different concept. It is the concept that was employed before it was co-opted by capitalism and it siblings ... the concept we employ when we are able to escape capitalism and its siblings. In it's most primitive instantiation it is just simple barter. With its ingenious invention of money it is simple barter spanning time and space, with guaranteed free supply of money; guaranteed perpetual zero inflation; and guaranteed zero interest load on responsible traders; and guaranteed rejection of deadbeats.

Traderism is the path back to the promised land. It extinguishes capitalists living off tribute from traders. It extinguishes governments living off counterfeiting.

gaoptimize's picture

When the Gov owns a controlling interest, it could appoint/elect the majority of the board and out vote other share holders on other matters before the shareholders/proxy.  Communism is a theoretical form of Gov where the whole people own the means of production, with the Gov acting as their representatives and managers.  Fascism is a very real form of Gov that has occured over and over.  Capitalism acknowledges individuals acting on their own for their own interests.  There is liberty in it, not found in the other two.

withglee's picture

When the Gov owns a controlling interest, it could appoint/elect the majority of the board and out vote other share holders on other matters before the shareholders/proxy.

Correct. But they're not buying controlling interest. They're just bailing out capitalists' bad bets with counterfeit money (i.e. inflation). And even if they got controlling interest, that's still less control that outright ownership.

 Communism is a theoretical form of Gov where the whole people own the means of production, with the Gov acting as their representatives and managers

And capitalism is a theoretical form of trade where someone must go hat in hand to someone who "has" something before they can "promise to make a trade" ... with gov (installed by the capitalists) acting as their representatives and managers ... and enforcers. A difference without a distinction.

 Fascism is a very real form of Gov that has occured over and over.  

Our MIC is facism.

Capitalism acknowledges individuals acting on their own for their own interests.

Only if those interest are blessed by capitalists. You're not a capitalist just because you have a screw machine in your shop.

There is liberty in it, not found in the other two.

Oh really? How much liberty do you bask in after 75+% of what you earn is spent by someone else on things you don't even want?

Do you really worship on the throne of capitalism and think it's any different than any other religion ... that it has a different god that's better than their god.

Get real!

Iterative secession. Maybe after that you'll find a sliver where you can have your religion and leave me out of it. My sliver will have traderism and won't let capitalists, communists, or facists in (ah ... but I repeat myself).

Blopper's picture

This is VERY IMPORTANT.

1. Central bank buying the stock market is supposed to be illegal and invalid. Why should it be? A central bank owned by the banking cartel printing fake money to buy up ownership of tangible/productive assets that benefits the banking cartel members is not to be tolerated. This is a financial ripoff outright.

2. If the central bank announces to buy more of the stock market, then there is no better choice for genuine investors except to follow the footsteps of the central bank's action, never mind whatever the economic fundamentals are telling. The reason for this is because the central banks are running a monopoly, whatever they do will have significant impact long-term, and to nationalize productive assets into the hands of the banking gangsters is probably their true intention. And so, in order to avoid yourself being deprived of such ownership (of productive assets), you have no choice except to grab a piece of the ownership while it's still available.

 

The Rothschild cartel is extremely covetous of national properties. And I think the only better way to spare yourself some future deprivation is to compete with the central banks in buying/acquiring the ownership of such productive assets of listed companies (by being a shareholder). I believe all the gloomy news that the market is at historical peak, that valuation is at historical peak, etc etc kinds and types of peaks is simply to scare everyone away so that the central banking cartel has NO COMPETITION in acquiring ownership (of listed companies). For your own sake, if you have money, BUY. Don't fucking care about the scaremongers. They are not spreading the news for your interest.

 

Update:

Regardless of what the fundamental says, regardless of what the economy says, regardless of what the demographic says, even at present moment the stock market is an EPIC BUY. At current situation, this is no longer about buying for investment returns. This is about buying for ownership, regardless of any return.

Lady Jessica's picture

This is about buying for ownership, regardless of any return.

"Ownership" LOL.  How quaint.

Blopper's picture

Most of us buy for return first, ownership second.

In the future, world conditions will no longer be about "how much return did you generate?". Rather it will be about "Do you own this asset/company?" If you do, then you will be lucky. If you don't, then you don't belong to the Club.

 

The central bank cartel NEVER consider investment returns from the very start of originating a central bank. The origination of a central bank is primarily to take control of national assets into the hands of the banking gangsters, slowly but surely. They don't care about returns because they can always print money.

withglee's picture

This is a financial ripoff outright.

Capitalism is two years. That's how long it takes to become a perpetual money creation certifier if you obtain a banker's credential ... and it "requires" non-zero inflation to sustain itself.

There is no difference between capitalism and communism. There is just the oscillation between the two. The capitalists call this the business cycle (which is just their farming operation in operation). The communists call this insufficient penetration and redouble their efforts.

Capitalism tends toward communism ... and back. Communism tends toward capitalism ... and back. It's symbiotic ... by design.

jharry's picture

The Utimate question -- which side will win the economic war now raging world wide?

Bopper09's picture

Some of my old posts joked that the 'end game' will eventually be that the central banks will own 100% of the phoney fraud stock market with their endless phoney fraud fiat printing. 

Ha? Ha?

withglee's picture

the Japanese market's performance would become increasingly a function of liquidity in the central bank's buying basket

What part of "infininity in counterfeiting" don't they understand?

Ban KKiller's picture

Ditto USA "free" market, no?

Tinky's picture

Could lead to "price distortions"? Ah, good to know that there currently aren't any.

Spungo's picture

The up side is that this bullshit creates huge opportunity. Most people are idiots, so most people will follow the central bank by buying grossly overpriced assets. That means nobody is paying attention to reasonably priced assets. Very few of my holdings are found in any index fund, and that's why the dividends on them are amazing. Lower stock price = higher dividends.