As those who follow such things are no doubt aware, The Bank of Japan often says some very funny things about inflation expectations and monetary policy. Essentially, the bank is forced to constantly defend its QE program because as it turns out, monetizing the entirety of gross JGB issuance and amassing an equity portfolio worth just shy of $100 billion on the way to cornering the ETF market comes across as insanely irresponsible even in a world that is now defined by insanely irresponsible central banks.
Perhaps the best example of the BoJ’s absurd rhetoric came in late March when Governor Haruhiko Kuroda said the following about the bank’s 10 trillion yen equity portfolio:
- KURODA: BOJ'S ETF PURCHASES AREN'T LARGE
As we noted at the time [9], either we don’t know what large means, or Kuroda is simply making things up as he goes along. Meanwhile, the BoJ continues to provide Nikkei plunge protection [10] on an almost daily basis. Here’s what we said in March:
The world has now officially given up any pretensions that Japan’s elephantine QE program isn’t underwriting the rally in Japanese stocks. Not only is the Bank of Japan buying ETFs, they’re targeting their purchases to (literally) ensure that stocks can’t fall by stepping in when things look weak at the open. Unfortunately, Kuroda looks set to run up against the extremely inconvenient fact that while, in his lunacy, he can print a theoretically unlimited amount of money, the universe of purchasable ETFs is limited and so eventually, the BoJ will own the entire market.
As recent gyrations [11] in Bund, Treasury, and JGB markets have made abundantly clear, when central banks corner markets, liquidity suffers and the seeds for sudden spikes in volatility are sown. Given this, and given what we know about the BoJ’s equity buying binge, we were not surprised to learn that now, Kuroda has not only broken the JGB market but the Japanese the stock market as well. Here’s more from Nikkei [12]:
The Bank of Japan's massive purchases of exchange-traded funds, part of its monetary easing program, could be contributing to sharp stock price swings by draining liquidity from the market…
Though the ETF-buying program had altered the balance by reducing supply, market players are noticing side effects.
Lately, "orders for some stocks have fallen, so it's gotten harder to complete trades," observed Kyoya Okazawa at BNP Paribas Securities (Japan).
Fanuc offers one example. The issue's volatility relative to the Nikkei average on a 25-day moving average basis bottomed out around spring 2013 and has been on an uptrend since. Coincidentally, the BOJ announced its unprecedented easing program in April 2013. The central bank's ETF purchases may have reduced liquidity, leading to sharper price movements.
Fanuc's 1.27% climb Tuesday was well above the Nikkei average's 0.02% increase. Its recent price movements probably have been influenced by growing momentum fueled by the company's plans to boost shareholder returns.
And here’s a bit of color which explains just how large Kuroda’s “not large” purchases are:
The bank has bought ETFs 32 times so far in 2015. This translates to about once per 2.7 days, compared with 4.3 days in 2013 before the easing began and 11.3 days in 2012 under former Gov. Masaaki Shirakawa. The average amount per purchase also roughly doubled to around 35 billion yen this year from just over 17 billion yen in 2014.
To put the BOJ's moves into perspective, if a new stock fund raised 35 billion yen, it would be the talk of the market. The central bank is making such purchases once every three days.
Finally, for those wondering whether the bank is still timing its purchases to prop up the market at the first sign of weakness, here is your answer:
The Nikkei Stock Average closed slightly higher Tuesday. Selling prevailed in the morning on weakness in U.S. and European stocks the previous day, but the benchmark index trimmed its losses in the afternoon and moved into positive territory shortly before the closing bell.
After the Nikkei average briefly dropped more than 150 points to fall below 19,500, many market players were certain the BOJ would step in. And after trading closed, the central bank said it had bought 36.1 billion yen ($297 million) in ETFs. These developments signal a growing sense of dependence on the BOJ.
There you have it. The BoJ has officially broken the stock market. The truly alarming part of Kuroda's endeavor is that the larger the BoJ's equity portfolio becomes, the more resolute the bank will need to be in terms of preventing stocks from falling because after all, you can't designate your stock portfolio as "held to maturity."
We believe the following clip does a nice job of summing up how the BoJ sees its QE program vis-a-vis other central banks:
