By owning 7% of the Japanese equity market The Tokyo Whale has beached itself

by Shaun Richards

The weekend just passed has seen quite a few developments which cover Japan. The first comes from a really extraordinary piece in the Wall Street Journal which has an eye-catching headline.

The central bank now owns about 7% of all the shares traded on Tokyo Stock Exchange’s first section.

Of course if you keep buying you end up with a large holding. This is the road on which the Bank of Japan has become called The Tokyo Whale. It is also significant for the article that the Bank of Japan has bought twice this month as it bought around 50 billion Yen’s worth of shares on the 4th and 5th of this month. Actually it buys some 1.2 billion everyday as part of its programme to improve “physical and human capital” and it is revealing that in the scheme of things it is not a big deal in itself.

Here is how the WSJ covers the programme.

Over more than a decade, the Japanese central bank, uniquely among its global peers, has poured hundreds of billions of dollars into local equities and now owns about 7% of all the shares traded on the Tokyo Stock Exchange’s first section. With stock prices near a 30-year high in Japan, shares bought by the central bank years ago  have surged in value.

Rises in share prices tend to happen when there has been a very large buyer with in theory infinite pockets which in practice has been heading in that direction. This has been the clearest example of a central bank offering a direct put option for those holding shares because it buys whenever the market falls and then the pandemic hit increased its daily purchasing clip to over 100 billion Yen. In addition to that there are the other monetary easing efforts of the Quantitative and Qualitative Easing policy or QQE of the Bank of Japan. This matters because look at the next bit.

Instead of winning praise for its investing acumen, though, the BOJ faces growing pressure to stop acting like the Tokyo whale and find ways to spread the wealth. Some are calling on the BOJ to hand out shares to the public or use its gains to seed corporate innovation, in an echo of debates in the U.S. about whether the stock market’s gains are benefiting ordinary people.

So if you rig a market such that the roulette ball nearly always comes up black that is now “investing acumen” is it? Spreading the wealth is not so easy when there is an element of Imagination about it.

Could it be that… it’s just an illusion?
Putting me back in all this confusion?
Could it be that. it’s just an illusion, now?
Could it be that… it’s just an illusion?

If we look at the “investing acumen” the Nikkei 225 has risen from around 8000 to around 29,000 but unlike other investors the Bank of Japan sets economic policy as well. It has surged again from the lows ( 16,538) of last March but again this was driven by Bank of Japan buying. I note that the “acumen” required purchases twice this month at around 29,000 to keep it going.  As to “corporate innovation” it is doing exactly the reverse by buying what are the bigger companies and ossifying the economic structure. Even the Japanese owned Financial Times has been pointing this out.

“Japan today cannot even ride the waves of technological and industrial innovation, let alone create them,” says Kazuto Ataka

This repeats the mistakes of the 26th of November last year.

TOKYO—One of Japan’s biggest stock investors just reported record gains of more than $50 billion after a well-timed bet…….That’s because the hot-hitting portfolio manager is Gov. Haruhiko Kuroda, head of Japan’s central bank. Mr. Kuroda has led the Bank of Japan ’s push, unusual among global central banks, to invest in the Tokyo stock market as a way of rousing the nation’s animal spirits.

It has been a rigged game and “rousing the nation;s animal spirits” is simply extraordinary.

The superb timing helped the central bank report a record jump for a six-month period in its stock portfolio’s gains when it released its semiannual financial report Thursday.

It front ran itself? Let me leave it there by pointing out it is only a profit when you take it. The larger your position the more risk you have taken on.

Bank of Japan share price

I have to confess the recent surge had me wondering if some thought that there might be a distribution of equity “profits” in the offing. Anyway best of luck being a minority shareholder.

No Change of Policy Ahead

Bank of Japan Governor Kuroda spoke in the Japanese parliament on Friday and the prepared text told us this.

In doing so, since the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control has been working well to date, the Bank judges that there is no need to change it.

This had an immediate impact on the bond market although some of this has faded Perhaps investors have been reminded of when he assured the Japanese parliament there was no intention to apply negative interest-rates and then applied them only a Beatles week ( 8 days) later.

As to equities according to Reuters he went further.

“We have been and must continue to buy ETFs flexibly. We’ll discuss at the March review how specifically we could make our purchases more nimble,” Kuroda said.

The key would be to make the BOJ’s ETF-buying programme nimble so that the central bank would step in only when markets become volatile and lead to a sharp rise in risk premia, he added.

No doubt he will explain to us at some future date exactly how a Whale can be nimble! Also may I point out that for all the regular rhetoric about reductions the annual target for purchases has so far gone 3 trillion, 6 trillion, 12 trillion…

The Yen

Here there has been a shift as the US Dollar has firmed a little presumably in response to the higher bond yields we have been noting. This has meant the Yen has weakened to 108 versus the US Dollar as opposed to the 103/4 we had become used to. The Pound has also risen to 150 Yen another development which the Bank of Japan will welcome.

Comment

There has been some extraordinary reporting on the equity holdings of the Bank of Japan. But they forget that the present share price relies on its enormous buying. No doubt other investors have front-run it so there has been a bow-wave in front of the Whale itself. Next comes the issue that even at around 29,000 it still feels the need to buy which is revealing and tells the lie to this from the Asia Nikkei last December.

If the Bank of Japan were a hedge fund, it would be congratulating itself on a blowout year, and getting ready to pay out enormous bonuses………A highly successful contrarian call,

In fact so successful that they er well….

If the BOJ carries on with its current strategy, it will eventually end up owning enough of the Japanese economy to gladden the heart of Karl Marx.

Indeed it seems to be a policy with no end.

So, what to do? The BOJ could sell its holdings, but ETFs have limited liquidity. Winding down such an enormous portfolio might cast a pall on investor sentiment for years.

So far it had been just that.

Intended to be a temporary measure, the policy has endured much longer than expected,

Not on here it has not as it has been obvious to us it is like the film “No Way Out”. Or as Joe Walsh put it.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

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