The latest shocking example of just how intertwined central banks have become in not only Treasury and corporate bond markets and their respective "valuations", but also in stocks, comes courtesy of the Bank of Japan which days ahead of an announcement which may see it double its ETF purchases from the current JPY3.3 trillion to JPY7 trillion or more (if Goldman is correct) has just been revealed to be a top 10 holder in about 90% of all Japanese stocks!
As Bloomberg puts it, "they may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank."
While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.
Under the BOJ’s current stimulus plan, the central bank buys about 3 trillion yen ($27.2 billion) of ETFs every year. While policy makers don’t disclose how those holdings translate into stakes of individual companies, estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.
The stunning chart showing just how deeply involved in the "fair value" of the Nikkei is shown below: it needs no explanation.
As Bloomberg adds, the estimates "reveal a presence in Japan’s top firms that’s rivaled by few others, with the BOJ ranking as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies. The central bank effectively controls about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder."
The news follows the well-known recent disclosure that the BOJ is already an owner of more than half of all Japanese ETFs.
What many had forgotten is that by directly buying and holdings ETFs, the BOJ also becomes a holder of the underlying stocks. It was just unclear to what extent.
Now we know.
But that's just the start. If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen, as Goldman predicted last week, the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.
This is simply unprecedented, and confirms that some time over the next several years, the Bank of Japan will not only own a majority of the Japanese bond market, but will be the outright owner of virtually all Japanese stocks!
Furthermore, recall what we have been saying ever since 2010, namely that central banks are nothing more than glorified risk-free hedge funds (because they can always print more funds if they need them)? Well, back then it was another conspiracy theory. Now it is an accepted fact: "When you see the numbers, you see it’s quite a decent holding,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which oversees about $120 billion. “Central banks are becoming big hedge funds."
But the most farcical is the defense by the BOJ's head whose only mission has now been exposed as one of propping up the Japanese stock market: while the BOJ’s ETF buying has come under fire from opposition lawmakers, Governor Haruhiko Kuroda has repeatedly defended the program, saying as recently as last week the purchases aren’t big relative to the size of Japan’s stock market.
With this new data he may want to reconsider: at an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund. The central bank’s use of large-cap ETFs means its positions are concentrated, with less impact on the thousands of Japanese companies outside benchmark indexes.
That said, the BOJ is not alone. The U.S. government spent $245 billion to prop up banks during the global financial crisis in 2008, earning a profit of about $30 billion on their investments as the industry recovered. At the height of the Asian Financial Crisis in August 1998, Hong Kong bought HK$118 billion ($15.2 billion) of local shares to defend its currency peg, helping to fuel a rally that allowed it to dispose of the entire stake within five years.
The only difference is that in the US, the Fed is leery of disclosing just how it manipulates equities (via Citadel, at key downward inflection points). In Japan, it has been well-known for nearly a decade that the BOJ buys equities via ETFs and REITs outright.
This is not only troubling but dangerous: the longer the BOJ’s buying persists, the bigger the risk that market prices will detach from fundamentals. Assuming Goldman Sachs’s prediction for more stimulus proves correct, the BOJ could end up owning a quarter of Mitsumi Electric Co., a supplier to Apple Inc., and 21 percent of Fast Retailing by the end of 2017, estimates compiled by Bloomberg show
Then there is the question of corporate governance, something hedge fund activists such as Dan Loeb have been railing against for years:
With such large stakes sitting in index-tracking ETFs that lack a mandate to scrutinize company performance, the BOJ’s intervention could also hamper attempts to improve Japan’s corporate governance, according to Nicholas Benes, representative director of the Board Director Training Institute of Japan.
The central bank said in December that it plans to buy additional ETFs that weigh holdings based on metrics that include research spending and employee wage growth, but the BOJ hasn’t started those purchases yet because the funds don’t exist.
As Bloomberg adds, while bulls have cheered the BOJ’s efforts to lift share prices, the central bank is bound to reverse its intervention at some point, a potential source of instability that Sumitomo Mitsui Trust Bank Ltd. says is increasingly on the minds of long-term investors. "Of course, you can argue that we’re in abnormal times so we have abnormal measures,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui. “The biggest question in the future will be: What happens when the BOJ exits?”
What exit? As Goldman said in its latest note yesterday predicting that Japan may unveil helicopter money as soon as this week, it said the BOJ simply has no exit any more, and will continue buying risk assets at an ever faster pace until it all comes crashing down.
The implications of a creeping central bank owner are widespread: "to critics already wary of the central bank’s outsized impact on the Japanese bond market, the BOJ’s growing influence in stocks risks distorting valuations and undermining efforts to improve corporate governance. Proponents, meanwhile, say the purchases provide a much-needed boost to investor confidence."
Which at its core, is all central banking is about: preserving confidence, and intervening to make sure stocks don't crash. This until several years ago was "conspiracy theory." It is now conspiracy fact."
"For those who want shares to go up at any cost, it’s absolutely fantastic that the BOJ is buying so much,” said Shingo Ide, chief equity strategist at NLI Research Institute in Tokyo. “But this is clearly distorting the sanity of the stock market.
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."