How many more central banks will end up buying equities?

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by Shaun Richards

One of the features of modern economic life is the way that central banks have expanded their operations. In a way that development is a confession of failure ( as why are new policies requited if they existing ones are working? ) Although of course that would be met with as many official denials as you can shake a stick at. We moved from sharply lower interest-rates to QE (Quantitative Easing) bond purchases to credit easing and in some places to negative interest-rates. The latter brings me to the countries I classified as the “Currency Twins” Japan and Switzerland who both have negative interest-rates and some negative bond yields. In fact this morning the Bank of Japan gave Forward Guidance on this subject.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding
economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.

So the first feature seems to be negative interest-rates and perhaps ones which persist as both Japan and Switzerland are on that road. Thus you start by funding yourself with money at a negative cost something which ordinary investors can only dream of. But we also have countries with negative interest-rates which have not ( so far) bought equities such as Sweden and the Euro area although the latter does have a sort of hybrid in its ongoing corporate bond programme.

However we find more of a distinguishing factor if we note that both Japan and Switzerland ended up with soaring exchange-rates due to the impact of the large carry-trades that took place before the credit crunch. This was what led me to label them the “Currency Twins”  and the period since then has seen them respond to this which has seen them via different routes end up as equity investors on a larger and larger scale albeit by a different route. An irony comes if we look at an alternative universe where Germany had its own currency too as in that timeline it too would have seen a soaring currency and presumably it too would be an equity investor.

Bank of Japan

Here is this morning’s announcement.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase
or decrease the amount of purchases depending on market conditions.

As you can see the Tokyo Whale will continue to gobble up the plankton from the Japanese equity world and at quite a pace. The latter sentence refers to the way it buys more when the market drops which of course looks rather like a type of put option for other equity investors. That is what it means by “lower risk premia” although more than a few would question if this is “appropriate”

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Also there are ch-ch-changes ahead. From the Financial Times.

the BoJ also said it would alter the balance of its ¥6tn ($54bn) per year ETF buying programme so that a much greater proportion was focused on ETFs that track the broader, market cap-weighted Topix index. The scale of its Topix-linked ETF purchases would rise from ¥2.7tn to ¥4.2tn per year, the bank said in its statement.

The Japanese owned FT fails however to note the main two significant points of this. The first is that the Tokyo Whale was simply running out of Nikkei index based ETFs to buy as it was up to around 80% of them and of course rising. The next comes from a comparison of the two indices where the Nikkei is described as very underweight this sector and it is much larger in the Topix ( ~9%). Regular readers will no doubt have figured that this is the “precious” or banking sector.

As of this month it has made major purchases on 3 days buying 70.5 billion Yen on each occasion.

Let us move on by noting that Japan has bought equities but so far they have been Japanese ones boosting its own market and keeping the impact on the exchange-rate to an implied one.

Swiss National Bank

The SNB has been a buyer of equities as well but came to it via a different route which is that once it implemented its “unlimited” policy on foreign exchange intervention it then found it had “loadsamoney” and had to find something to do with all the foreign currency it had bought. The conventional route would be to buy short-dated foreign government bonds which it did but because of the scale of the operation it began to impact here and may have been a factor in some Euro area bond yields going negative. The Geneva Whale would have found itself competing with the ECB QE operation if it had carried on so switched to around 20% of its foreign exchange reserves going into equities.

That is a tidy sum when we note it had some 748.8 billion Swiss Francs of foreign exchange reserves at the end of June. How is that going?

. The profit on foreign currency positions amounted to CHF 5.2 billion.

So at that point rather well but of course it is rather strapped in for the ride with its holdings which will have led to some fun and games more recently as it notes its holding in Facebook as the tweet below illustrates.

If you ride the tiger on the way up you can end up getting bitten by it in the way down. Also a passive investment strategy means you raise your stake as prices rise whereas an active one means you are an explicit as opposed to an implicit hedge fund. Some like to express this in terms of humour.


We do not know if the recent weakness in the so-called FANG tech stocks is just ebb and flow or a sea change, but the latter would have the SNB entering choppy water.

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We see that this particular development can be traced back to the carry trade and a rising currency. Both of the countries hit by this ended up with central banks buying equities although only the Swiss have bought foreign equities. Perhaps the Japanese think that as a nation they own plenty of foreign assets already or there is an inhibition against supporting a gaijin market. That would be both emotional and perhaps logical if we note how many lemons have been passed onto them.

Looking ahead newer entrants may not follow the same path as we note that once a central bank crosses a monetary policy Rubicon it has the effect of emboldening others. The temptation of what so far have been profits will be an incentive although of course any suggestion that such moves are for profit would be meant with the strictest official denial. Should there be losses however we know that they will be nobody’s fault unless they become large in which case it will be entirely the fault of financial terrorists.

Putting this into perspective is the price I am about to describe. Around 1000 until the middle of 2016 but rose to 8380 earlier this year and as of the last trade 6080. One of those volatile coins the central bankers dislike so much? Nope, it is the SNB share price in Swiss Francs.


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