When it comes to central bankers gone “full Krugman” (as it were) you’d be hard pressed to find someone more Keynesian crazy than BoJ governor Haruhiko Kuroda.
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Kuroda - who earlier this year likened himself to Peter Pan [8] on the way to explaining that it’s possible to conduct unconventional monetary policy in perpetuity as long as market participants continue to “believe” - has not only managed to suck up the entirety of gross JGB issuance, he’s also succeeded in cornering the market for Japanese ETFs.
In fact, the BoJ now owns 52% of the entire Japanese ETF market.
Given Kuroda's penchant for Einsteinian insanity (because all the QE in the world has thus far failed to rescue Japan from the much maligned "deflationary mindset"), the market was surprised when the BoJ failed to boost stimulus in late October. Of course as we noted at the time, the central bank is running out of monetizable bonds and thus each incremental purchase leads Japan one step closer to the end:
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Thankfully there are still more ETFs to buy and even if there weren't, Kuroda would simply make some up. Last week, in what amounted to a kind of stealth tweak to QE, the BoJ announced it would buy ¥300 billion in additional ETFs comprising stocks of companies “proactively making investment in physical and human capital ".
As Goldman noted, "the BOJ is due to resume the sale of stocks it purchased over 2002-2007 to encourage financial institutions to reduce their shareholding risk. Since these annual sales will amount to roughly ¥300 bn a year, the establishment of a new ETF purchase program appears designed to absorb the impact of those sales."
The problem: no ETFs specifically tailored to capex spending yet exist for Kuroda to buy.
"Such ETFs have never been made in Japan, at least not yet," Bloomberg writes [10], adding that "even as fund providers start hundreds of so-called 'smart beta' products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets."
“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. said. “I think the message from the BOJ is for us to go out and make them.”
Yes, that probably is the message, because when your economy has plunged into recession an unprecedented five times in five years (the rare "quintuple dip") you'll do just about anything to revive it, including privileging certain companies over others by effectively promising to push up the stocks of corporates that are stimulating the economy and investing in their workers (remember, Japan has a pervasive wage growth problem). “It’s the same as if the Bank of Japan were buying individual stocks, rather than pushing up the overall market,” Yoshihiro Ito, chief strategist Okasan Online Securities said.
Ultimately, this may also be an attempt to forestall the inevtiable. Remember, at the current clip (JPY3 trillion per year), Kuroda will own the entire Japanese ETF market by the end of 2017. The only way out of that is to expand the pool of purchasable funds. Effectively forcing the creation of new, capex-specific ETFs thus kills two birds with one stone: it gives the BoJ more purchasable assets and incentivizes companies to spend their cash in a way that's agreeable to Abe. Nevermind the fact that this represents the central bank dictating what companies do with their money.
