It is no secret that unlike other banks who, while directly intervening in the bond market only manipulate equity prices in relative secrecy (usually via HFT-transacting intermediaries such as Citadel), the Bank of Japan has historically had no problem with buying equities outright, traditionally in the form of REITs and equity-tracking ETFs. Which explains why overnight it was revealed that in order to boost the stock market, pardon, economy, the Bank of Japan is preparing to purchase exchange-traded funds based on the JPX-Nikkei Index 400 as an "option to boost the impact of unprecedented easing," according to people familiar with BOJ discussions.
Bloomberg reports that including funds that track the index would broaden the range of shares in the BOJ’s ETF purchases, and encourage companies to deploy cash for investment. That is the official storyline. It goes without saying that what the BOJ is really after is to generate further upside in the Nikkei225 which unlike other stock markets, is still notably in the red, because not only will the primary impetus behind QE - the wealth effect of the 1% - suffer, but also all those new billions in Japanese pension funds reallocated away from bonds and into stocks will continue to lose money. And the last thing the Abe cabinet, its popularity already flailing needs, is the realization that it has gambled the retirement funds of the locals on the biggest Ponzi scheme in Japanese history.
To be sure, the BOJ's ETF expansion is nothing new and had been telegraphed before. Recall from April, when we learned that Japan’s central bank will probably double purchases of exchange-traded funds in a second round of monetary easing under Governor Haruhiko Kuroda anticipated in coming months. The Bank of Japan... will increase annual ETF buys to 2 trillion yen in months ahead, according to a survey of 36 analysts. The bank could boost annual bond purchases by at least 10 trillion yen, with July most favored for a policy move.
“Kuroda doesn’t need to move as drastically as in April last year, when he was shifting the economy from deflation,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “By doubling the ETF buys, the BOJ can send a message that it’s there to take action when the economy weakens.”
In an interview on Feb. 11 last year, before becoming governor, Kuroda said that the BOJ needed to use “whatever measures are available” to eradicate deflation, adding that the bank could buy the equivalent of trillions of dollars of financial assets. Still, it has held off from seeking some additional tools such as purchases of foreign bonds, a measure advocated by former BOJ Deputy Governor Kazumasa Iwata.
Kuroda is not without his critics. Kunio Okina, a former head of the BOJ’s Institute for Monetary and Economic Studies, has raised concerns that the BOJ is financing government spending.
“The Bank of Japan is making large-scale government bond purchases that will paralyze the market, and public spending that relies on these purchases is propping up the economy,” Okina, a Kyoto University professor, said in an e-mail.
July would be a good time for the BOJ to add to its stimulus, with Prime Minister Shinzo Abe set to unveil fresh measures for his growth strategy in June, the “third arrow” of Abenomics, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. An early move would also bolster the economy ahead of Abe’s decision on whether to raise the sales levy to 10 percent, as he grapples with the world’s biggest debt burden, Kanno said.
Of course, what is completely ignored is that while stocks are indeed suffering, the effect of importing inflation has already manifested itself, exclusively in costs of food, energy and various other imported goods and services. Where it is not manifesting itself is in the one place where it should: wages. Recall that in May, even as inflation soared to the highest in decades, real wages tumbled to the lowest point hit since Lehman.
There is, however, a catch to the BOJ's ambition to once again double down on stock purchases. As Bloomberg added, an increase in funds tracking the JPX-Nikkei 400, higher liquidity and vibrant trading in futures would be required before any decision to add the new benchmark to the bank’s ETF program. And since liquidity in the Japanese capital markets has essentially evaporated, with a handful of daily bond trades now the norm, making a mockery of "vibrant trading", Kuroda may face some troubles. Still, it is doubtful that any structural considerations will stop the BOJ from steamrolling into the stock market too, and just like it did with the JGB market, completely takeover the Japanese stock market as well, which once the ECB is on the bid in the broad market tracking ETFs, will mean that equity volumes and liquidity, already abysmal, will simply grind to a complete halt as yet another market falls under the reign of central planners.