Less than six months after we pointed out that the BoJ owns 52% of the entire Japanese ETF market, Reuters reports that the Kuroda's Peter Pan fairy tale, aka the Bank of Japan, is thinking about buying even more. The BoJ is said to be currently buying $30 billion of ETF's a year under its current policy, however since the Nikkei is down over 10% this year, that figure is apparently not enough to keep the market propped up.
Here's how the BoJ's holdings in the Japanese ETF market looked visually in recent months:
"Increasing ETF buying in huge amounts, combined with a modest increase in bond buying and an interest rate cut, could be the only way left to surprise markets," said a former BOJ executive who retains close contact with incumbent policymakers.
The reason for the BOJ's desperation shift to monopolizing the equity market next is that as we have warned since 2014, it is running out of bonds to purchase: "the BOJ's huge bond purchases are also drying up market liquidity, which further limits the scope for a large increase."
"They are crossing off a list of things that aren’t possible, and the only thing that’s left is buying ETFs," said Richard Jerram, economist at Bank of Singapore.
Japan's ETF market is just 15.8 trillion yen, of which the BOJ already holds about half, but ETFs can be easily cobbled together by brokerages, so there is scope for plenty more, given Japan's TOPIX stock market weighs in at 500 trillion yen.
Recall that the Bank of Japan's purchasing of ETF's does in fact lift the market, but questions remain around how much losses the bank will incur after the euphoria wares off, and how they can ever exit their position without collapsing prices.
"The BoJ will not easily be able to retract this liquidity in the future without destabilizing markets", said Andrew Meredith, co-managing director at Tyton Capital Advisors
What "retraction"? The BOJ will never be able to "retract" as at this point this is the all in gamble; Kuroda knows very well that should the Nikkei drop a few more percent, he and Abe are out. Even the BOJ itself realizes this:
There are doubts raised within the BOJ, too, but those voices are in retreat as Kuroda stretches the limits of monetary policy, and dissenters to his radical money-printing policies are being replaced by supporters, the sources say.
"I don't think worries about an exit are high on the list of the BOJ's priorities," said another source familiar with the BOJ's thinking.
Worse, increasingly every BOJ proposal is being seen as a joke by even the "serious" members of the analyst community.
Jerram at Bank of Singapore said he was not convinced buying ETFs would help much with the BOJ's principal goals, however, as there wasn't a clear transmission into economic performance.
"They do something for the sake of doing something, and people see through that pretty quickly," he said.
With the only tangible success of NIRP being that the BoJ has broken the money market, it will now embark on a journey to push on the string from the other direction, ultimately from the boardroom.
As we said back in October, "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."
Which brings up another question: why is it that central banks have no qualms about reporting their purchases f ETFs but, with the exception of the SNB, are yet when it comes to purchases of single name stocks (or, gasp, crude oil) during key inflection points, it is still considered a taboo? After all, there are no markets left that are isolated from central bank intervention anymore.