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."