In addition to being well on the way of cornering the Japanese bond market, the bank of Japan is even further on its way of cornering the Japanese stock market.
Bloomberg reports Bank of Japan Owns More Than Half of Nation’s ETFs.
The Bank of Japan may become an even bigger shareholder of the nation’s equities if policy makers decide to boost stimulus this week. The central bank’s holdings have been rising since it began buying Japanese exchange traded funds at the start of the decade, and now account for more than half of those ETFs.
Clearly 50+% is inadequate. Japan’s central bank needs to corner 100% of the market. After it does, it can then institute rules that share prices can only go up in price, never down.
For my sarcastic take on cornering the bond market, please see Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less.
Mike “Mish” Shedlock
Thomas Malthus said:
What would be the implications/consequences of the BOJ owning the entire market?
Bob Kupps said:
It seems inevitable so I guess we’ll find out.
Thomas Malthus said:
Once you start down this path – just like the path of QE/ZIRP – there is ultimately no way out.
All eyes on Japan for what is headed our way.
That said – when Japan implodes – we are not likely going to get the opportunity to follow that path — we will implode at the same time.
Oh well – we’ve had a rather wonderful hundred years of modern civilization.
Nothing lasts forever.
Brian E Considine (@e_considine) said:
Of course there’s a ‘way out’. Neither the bonds nor the shares are destroyed just because the central bank buys them. In both cases the central bank can simply decide to start selling. Or in the case of bonds the central bank could simply decide to stop buying and slowly the bonds will turn to cash as they mature.
It isn’t that simple. The market isn’t the shares or bonds, nor the currency. The market is an extremely complex web of decisions, agreements and opinions of a whole society. When a single actor takes control of a large part of that it pushes out, or rearranges everything else, to fit into that new presence. That footprint on the market does not disappear once the foot is lifted, it remains indelibly etched not only in history but in the consciousness of that society, it has redirected the evolution of the all.
So it is very natural, or wise, for people to question the aim and ultimate effect of such a powerful force manifesting itself.
Wouldn’t be much of a “Market” if only one entity owned it all. More like a closed system, like Cuba or the USSR.
Wouldn’t be much of a market if one entity owned it all. More like a closed system such as Cuba or the old USSR.
Thomas Malthus said:
Cuba and the USSR did not have stock markets. We are in unchartered waters.
I struggle to understand the specific implications although surely this has to end in a cataclysm.
Pater Tenebrarum said:
Indeed, this process has consequences that are closely related to the socialist calculation problem. Once a sole actor becomes a vertically integrated owner of most of the market, the ability to engage in economic calculation declines, as prices become less and less reflective of the complex web of individual decisions that usually shape them.
Stuki Moi said:
The potential real effects depends on the share of equities held by ETFs.
The “stimulus” in general over the past 25 years, have devastated the competitiveness of the Japanese exporting industry. They’re still world beating in many areas, but their costs of absolutely everything, have been artificially ratcheted up by the policy of them having to compete for every input with an army of subsidized and value destroying zombies.
Germany and surrounding European manufacturing/exporting powerhouses which until very recently did not go down the road to unrestrained idiocy; along with South Korea, Taiwan and perhaps smaller Asian economies like Singapore, have been the main beneficiaries.
Brian E Considine (@e_considine) said:
Good point, Mish’s sensationalistic headline could lead someone to believe the bank had purchased 50% of the shares of all companies that trade on the Japanese exchange. ETFs do not own all the stock in the market so having 50% of EFT’s is not owning half of the entire market.
You fall down, though, with your zombie company assertion. I think what you’re saying is something like this:
“There are some really good, efficient export orientated companies in Japan. But they are in competition with companies that are a lot less efficient. These companies would normally go bankrupt as deflation means the prices they get for their goods goes down but their bloated fixed costs remain the same. However these funds are able to tap capital markets (How? by issuing IPOs?), which keep them going. This means the good companies have unfair competition and the good companies cannot capture the market share held by their bloated rivals.”
This all sounds good except for the fact that most EFT’s buy stock based on the market value of the underlying market. That means if you have a huge bloated company (let’s say Blackberry from 10 yrs ago) getting attacked by some newer entry (say Apple iPhone as a spin off company), the stock value of the latter will increase relative to the former. The weight of the latter will increase in EFT’s too which means while a capital market that is more loose with money helps both companies, the better company gets helped a lot more. In fact if the weaker company is really bad, more money in stock markets might not mean anything for it since investors will still not normally channel money into a dying company with no clear hope of a turnaround.
Stuki Moi said:
The “stimulus” I was referring to, is the much more general one. ETF buying is a tiny component of BOJ shenanigans.
Most BOJ and Government “stimulus” has served to keep construction outfits afloat, and overvalued real estate way more expensive than it otherwise would be. Just like in the West, just with a 20 year lead. Saddling genuinely competitive exporters with higher labor costs, since they have to compete for Japan’s all of 3 remaining working age people, against builders building bridges to nowhere etc. And pay higher office rents. Higher salaries to compensate employees for the higher rents etc., etc.
And that is just first order effects. Add to that the effect nominally higher “asset” prices (relative to consumer prices) have on the potential profitability of producing something worth vile, versus squabbling over ownership of already existing, dead “assets.” Which, amongst other things, skews workers towards the squabbling professions, and away from the productive ones. And makes it more important for Corporate C-levels to be well versed in squabbling, instead of doing something productive. Etc., etc….
No matter how many people are listed as having “jobs,” and how much all those people supposedly “make” and “consume,” the only thing that really matters in the end, is how much net value is added. Which, at best, is tantalizingly close to zero for all of the trumped up hamsterwheel running that Keynesians are so fond of encouraging. And by increasing demand for limited resources, the hamsterwheeling is driving those resources’ costs up. Making it harder for those remaining few souls still in the, nowadays ever so quaint, business of actual value add.
‘Squabbling professions’ LOL.
Will have to remember that one .
The insanity of our cheap money times.
Funny how this has never been tried before in history…
Oh wait – it has. And it always ends in disaster.
This just means Japan is 50% complete of its communist goal! Always reminds me of Jefferson’s warning that banks would make a slave out of everyone – in Japan’s case, they’re doing it in broad daylight.
The Fed is doing the same enslavement of people in the US with it’s mandated cost of Capital being set by bureaucrats instead of market players.
Czars be Czars pretty much the world around.
Agreed. The inevitable result of lowering interest rates to get out of recessions is QE, then NIRP, then full ownership of all private businesses – or communism.
Central banking is inherently incompatible with capitalism. The world will slowly (or quickly) see this.
“Why Stop There?” They won’t stop there and probably few expect them to stop. But few really understand where this ends.
Well stated. Unlike a virtual reality TV production, where one can simply switch the channel this one will shock and awe some folks when it finally reaches it’s inevitable conclusion.
Stocks are the first to go when bond liquidity is diminished. Exters Pyramid comes to mind.
What I can’t figure out is how in the hell any semblance of confidence in manipulated markets, and the instigators of them, still remains in Japan.
Or even in the EU, for that matter. Stockholm Syndrome, maybe?
Market confidence has been successfully replaced with market fear and corruption. While we once made our financial decisions based on some level of confidence in rules universally applied and a general understanding of the laws of supply and demand, we now rely only on the fundamental knowledge that we are trapped within a corrupt system dominated by banks which are in league with law makers to ensure a continued stranglehold on wealth and power. Our traditional take would be that with the loss of confidence in our system, people would be abandoning it, but we now have no place else which to go for improved security and wealth preservation. As a matter of fact, we are witnessing ramping markets due to America’s strength, not in principles but in scale. In a world of corruption of which there is no escape, the only thing that appears to make sense to many is to align with the most powerful corrupt entity. We are simply on the high side of the Titanic, feeling pity to all those already drowned while convincing ourselves that being so smart to have dry feet, that we will all be just fine.
Thomas Malthus said:
Yep – funds are lining up to buy new debt issued by Argentina — in fact the latest tranche is heavily over-subscribed.
This is debt from a serial defaulter!
That is evidence that everyone knows what the end game is – in the meantime you just grab whatever gives you yield… no matter how much it stinks.. because at the end of the day EVERYTHING is dog sh%t. When collapse comes you can hold what you think is the safest possible asset — and it will be worthless.
So just subscribe to whatever offers the best return. Makes sense.
You need to dance while the music plays – even if the music is a loop of Air Supply’s Greatest Hits.
Thomas Malthus said:
Don’t fight the PBOC?
Makes sense — what is to be gained by sitting on the sidelines or shorting — when this goes sideways nobody collects on those shorts.
We are talking total collapse.
Probably a good time to have guns and canned goods haha.
I mean, what the hell, should we short EWJ or will the BOJ buy that too?
Just say NO! Stay out of the casino.
Al Tinfoil said:
Let me say again:
Kuroda/Abe/BoJ plan is to take full ownership and control of the stock and bond markets in Japan, buying everything in sight with fiat Yen. The Bank of Japan will buy up all Japan’s government debt and cancel it – at no cost because the Yen used to buy up the debt is mere fiat paper. The cost of purchasing stocks and non-government bonds is zero, since fiat Yen is used for purchases. The BoJ can buy up all bonds it issues, and cancel them as well. Japan’s government debt can be reduced from 250% of GDP to ZERO!
Result? The Boj will have a balance sheet with zero debt and huge sums on the positive side for all the stocks and non-government bonds it bought. The Yen will look rock-solid after the BoJ cancels all the government bonds and all the bonds it issued.
Japan can then go on a buying spree around the World, buying up resources and production facilities spreading its financial, commercial, and political influence. In this way, Japan will be able to rival China’s CapEx expansion and create a Worldwide Japanese economic empire. Japan can secure foreign supplies of food, fuel, and raw materials to fill all the needs that it cannot meet from domestic Japan sources.
Japan could even buy up living spaces for all its population that is now being slowly irradiated to death by Fukushima radiation.
Why didn’t I think of that? I have a very nice color laser printer.
The only thing that would stop them is competitive devaluation. This is why it is so important to have a single world currency and bank. Without competing currencies, they can print all they want.
It’s only a $70bn holding of ETFs; pocket money in the great scheme of things. They don’t Jen half the market. That would be a headline fir debate….
Jacob was right said:
But Mish, as long as deflation remains, will the ever be a problem? The value of a central bank’s assets are only important when you are trying to withdraw excess liquidity or rein in inflation. As long as deflation remains to be the state of affairs the bank of japan can buy every paper asset it wants and it wouldn’t matter. Yes, it wouldn’t fix the deflation, but it also would not produce a negative effect.
Back in June with little fan fair Japan Post said that it will significantly alter its investment strategy as the state-owned group revamps its 300 trillion yen portfolio. Because of the mere size of Japan Post Holdings this is should be considered a signal of major importance and has far-reaching implications.
Traditionally, with close ties to the government the investment strategy of Japan Post has been very conservative with low-yielding JGBs making up more than half of its portfolio. This may someday be looked on as a watershed event as to how the Japanese began shifting away from a falling yen to protect their wealth. More on this story below.
When all currencies are fiat, debt is just a number. If currencies have no intrinsic value then debt has no intrinsic burden on society. When we go to a cashless society the transition will be complete.
Doufas Gowk said:
When the US feds starts owning corporations, they’ll be able to stop corporations from moving to other countries to avoid paying taxes.
Japan’s Keynesian policies are the same as policies of communist china. In china, the government, tell everyone to buy stocks creating a bubble, then when the bubble burst, chinese government stepped in to buy stocks and fails to stop the crash. In japan, the BOJ tell everyone to buy stocks via monetary gobbledigook, and when the stock bubble burst, BOJ stepped in to buy stocks and fails to stop the crash.
Cocoa Blini (@cocoablini) said:
Classic Pump and Dump scheme in China. Drive asset values sky-high, get everyone’s money in the market and then front run the crash. Make money going down and pick up the pieces using all that money you stole pumping. Buy at 50% discounts. Rinse and repeat-keep heisting the average guy
Cocoa Blini (@cocoablini) said:
To save the markets, the Central Banks have to kill the market. If everything is overvalued then liquidity slows and all the money is stuck in assets. If the assets cannot devalue (by mandate) then all this money that the CB’s are creating still gets stuck in overinflated assets. If the CB’s mandate 2%+ a year in virtuous inflation, then everyone holds their assets or cash. 2% inflation targets are a scam invented by Central Bankers to prevent their rich friends from getting hosed by margin calls and decreasing leverage. As you can see, capital markets are dead and the CB’s have no solution to normalize them UNLESS they allow the natural value of assets to be discovered. Probably near 50% of current value.
The current economic system is in a slow transition to a system that protects the wealth of the asset holders now. First by protecting values in the market using computerized manipulation but soon it’s just going to be like Soviet Style mandates.
And remember, unlike the Soviets who tried to keep prices LOW, the US is keeping prices HIGH to assist the wealthy classes maintain their status
Wasn’t ir Communistic to ‘own the means of production’? How is BOJ owning a large majority of all the stocks and bonds any different?
Seriously, I’ve been in the financial services industry for 20 years, and I am a nerd. I read a lot, and have a Macro Economics background and interest. Can anyone articulate a probable end to this? I cannot. The timing of the “end” of this is impossible. I’m not interested in guessing when this experiment ends. I can post-rationalize everything that has happened, like the Yen strengthening against the dollar after the BOJ went to negative rates, but I could never have predicted it. The ONLY thing I’ve been right about was that rates are going to stay low for a lot longer than anyone believes.
But, does anyone have a reasonable guess as to what events will finally end this experiment? Is War the only possible ending? Every apocalyptic prediction has been exactly wrong so far. I am at a loss. Mish, thanks for all the years of free information. I’d love your take on this.
Tony Bennett said:
“For my sarcastic take on cornering the bond market,”
Read more like one of those central bank trial balloons “leaked” …
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