One Bank Is Unsure If Any Humans Still Trade Stocks In Japan, Or Have All Moved To Bitcoin

While the wholesale disappearance of retail traders from stock markets is hardly a novel observation, it has taken on a whole new meaning in Japan, where the lack of carbon-based investors has prompted Deutsche Bank to ask if "Japan's stocks are still traded at all by humans."

As Deutsche strategist Masao Muraki writes, since the US presidential election, Japanese stocks (in this case the TOPIX index) have been almost entirely defined by just three things: US stocks (S&P 500), the implied volatility (VIX), and USDJPY. This is shown in the model correlation chart below.

And while some observers think that foreigners are buying Japanese stocks on hopes for Abenomics following the Lower House election, this aspect is not apparent in the Figure above according to Deutsche. Instead, according to the German bank, it is the 10Yr US yields  that determine relative performance of Japanese and US financial stocks most directly. Additionally, interest rates, forex, and option prices (implied volatility) are defining absolute share prices for Japanese life insurers and banks, as shown in the charts below.

Furthermore, while financial institutions delivered some surprises in earnings announcements and shareholder returns and major developments took place in bank and insurers capital regulations in 2017 too, Deutsche notes that it "cannot find any indications of active change in allocations to life insurers and banks by investors due to these factors."

These observations prompt Deutsche to ask "a basic question", namely "whether the power of price decisions for Japanese stocks (particularly financial stocks) have shifted from people to algorithms or AI." Some additional thoughts:

Shift to passive fund management has accelerated, partially due to the impact of the Department of Labor’s fiduciary rules, and the trading share of active funds, which follow decisions led by human, is declining. With reduced influence, active funds appear to be focusing on sectors with drastic fundamentals changes (such as technology sector). In fact, more than 70% of inquiries from overseas equity investors to our insurance, securities, and other financial sectors team in December were about SBI, which indirectly owns cryptcurrencies. Reduction of active management costs due to MiFID2 might accelerate this activity.

And since Deutsche is clearly correct that increasingly more, if not the vast majority, of trading decisions and execution has shifted from humans to machines, the outcome is concerning, because as the German bank notes, "if the price formation based on model is prolonged, the gap between price and fundamentals will be wider. Thus, stock price correction may occur periodically."

Yet while Japanese equities may no longer be interesting to local humans, the same can not be said for bitcoin, where as the same DB strategist "discovered" two weeks ago, it was mostly "Mr. Watanabe" trading the world's most popular cryptocurrency:

An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.

This in turn prompted us to wonder, tongue-in-cheek, if Bitcoin wasn't a secretive ploy by the BOJ - which has had a far more permissive approach to bitcoin cryptocurrencies than its central bank peers - to boost Japanese animal spirits, which had been squashed by three decades of chronic deflation and disenchantment with rigged equities. Today, Deutsche Bank poses a similar question when it asks "Will Bitcoin ignite the “speculative spirit” of Japanese people?"

We will be closely monitoring the risk-taking stance of Japanese retail investors in 2018 in light of the management of ¥900trn of the ¥1,800trn as deposits in overall personal financial assets. Japanese retail investors eagerly purchased certain assets at prices with little support from fundamentals during the bubble period in the 1980s and the IT bubble period around 2000. Symbolic choices were NTT shares that listed in February 1987 for the former and Hikari Tsushin shares that listed in 1999 for the latter (Figure 1).




The emergence of “Bitcoin wealthy” might ignite the “speculative spirit” of Japanese people with strong follower aspirations.

Taken to its extreme, encouraging speculation in bitcoin - and in general any asset that is up over 15x YTD - would be a perfect way to rekindle not only animal spirits, but Japan's reflationary impetus.  One can see why the BOJ could, if not would, be behind such a "wealth creation" mechanism.

Finally, as Deutsche accurately points out, "of course, speculation at prices with flimsy fundamentals support unleashes strong backlash once asset prices weaken. Overly leveraged trades, in particular, are a concern. Cryptocurrency prices plunged on 22 December, and we think this impacted retail investors using margin trades."

Well, not really, because the December 22 plunge is now long forgotten, and the real question one should ask is whether the Bank of Japan had anything to do with the sharp rebound in bitcoin which plunged as low as $10,500 last week before surging back to $16,000 earlier today...


aloha_snakbar Tue, 12/26/2017 - 11:35 Permalink

What people should be focused on is not arguing with each other, but the adoption of a digital/gov fiat in your country, that would lead to a 'one world' currency. Game over. They win. Its brilliant marketing, if you think about it; appeal to the idealism of youth (Millennials) with a script of 'bad bankers, bad/evil system', throw in some bank for the early adopters, and the rest will literally stampede/walk over the others to get their piles of fiat. It is exactly the same script they use to get volunteers for their wars; create a few false flags, invent bogeymen/terrorists, and before you know it youth will be flocking to hell holes in a desert somewhere to fight the rich mans wars. Seems like a great idea, until you end up in a VA hospital with no arms or legs, and you need a nurse to scratch your balls for you.Same thing here, except what is a stake is what remains of what little freedoms we still posess...

Silver Savior Tue, 12/26/2017 - 11:40 Permalink

I really don't understand if you have money to throw away why you would not just abandon stocks and go into crypto but not necessarily bitcoin I think crypto at this point is just as legit as stocks.You can make more money in a day in crypto than you can a whole year in stocks.Money may not even be made in some stocks because of inflation. And inflation is not the few percent that they say it is. More like 10%.

Endgame Napoleon Silver Savior Tue, 12/26/2017 - 20:29 Permalink

If I had money, I would split it into several categories:

~ a stock that I like just because the company is interesting

~ gold or silver

~ newer cryptos with privacy protection, listening to James Altucher because he is a programmer.…

If cryptos become mainstream, I do not think most people will take this kumbaya attitude about transparent, cloud-based transactions that peers review and la la la. I think people will want more privacy, regardless of how boring their lives are or how meager their resources. Gen X, anyway, will not be so trusting.

In reply to by Silver Savior

small axe Tue, 12/26/2017 - 11:41 Permalink

there is no bond market or stock market in Japan. The BOJ destroyed them in order to "save" the economy by eliminating price discovery.welcome to Fantasia. Be happy and eat your gruel.

Exponere Mendaces Tue, 12/26/2017 - 12:28 Permalink

Nice cherry-picking with the Bitcoin prices from 2016 onward.ZH has no clue, praising Bitcoin then damning it in the next "article".So, should we increment the "Bitcoin is dead" counter to beyond 200? Funny how that pattern repeats, and Bitcoin doesn't give a shit.

JibjeResearch Tue, 12/26/2017 - 13:10 Permalink

Gentlemen, look at Coinbase (and other crypto exchanges) carefully.  It's the future of banking.  Many traditional banks, Bond platforms, FX exchanges, Commondity exchanges, and Stock brokers will offer crypto in the future.We are moving in that direction.Get on the future train ASAP!

Zero-risk bias Tue, 12/26/2017 - 13:29 Permalink

Could part of it be a barrier to entry issue? Since when has Apple's or Microsoft's stock been marketed to the world's disenfranchised who only have access to buying and selling of assets on an internet enabled computer. I don't remember ads appearing on my screen, left right and centre for brokerages selling shares of XY or Z limited co. in my lifetime.Secondly, I don't see China's central bank issuing a one-world crypto-currency, infact, I don't hear about any nation state issuing a one-world crypto-currency. Yet, you say? Well, convince me, if that's the goal, how are competing state-owned crypto-currencies going to achieve that?Physical cash is dead, and will be phased out. But with or without crypto-currency.