Today has already seen some eye-catching and thought-provoking news from the land of the rising sun or Nihon. Fortunately its new stealth fighter has not been seen taking off from its aircraft carriers excuse me helicopter destroyers merely from a runway. But we have seen news on a subject I analysed on the 19th of this month with this question.
How many central banks will turn into hedge funds?
As you will see there have been many other questions posed by what has now taken place in Japan so let’s crack on.
The Tokyo Whale
Those of you who recall what happened when The London Whale scandal emerged you may already be troubled by that name. Here is a Bloomberg reminder.
The trader known as the London Whale lost at least $6.2 billion for JPMorgan Chase & Co. in 2012……..More importantly, it raised two worrisome questions: What if the banks are still addicted to risk? And what if regulators haven’t gotten better at spotting that?
For me there was a familiar issue.
In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets.
The doubling down issue is a clear theme for us to consider as we peruse the announcement from Bloomberg.
The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.
JP Morgan again or another bank considered too big to fail?
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.
Regular readers will have been aware of the reality of this but as we go on the scale of it comes home to roost.
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
Here it is in another form.
I am not so sure about his order of importance but that relates mostly to the time zone he is broadcasting too. As we look into the detail we see this.
The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling 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.
Something for shoppers at Uniqlo to consider as well as musicians and even me when I buy some more soy sauce! Another way of looking at the scale is shown below.
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.
So it is a trillion Yen larger than the Bank of Japan numbers I posted last week and nearly a third of the size of what is considered an enormous player in Japanese markets the state pension fund. At the current rate of purchases it will not be long before it passes that benchmark as I pointed out on the 19th.
Second, it would purchase ETFs and J-REITs so that their amounts outstanding would increase at annual paces of about 3 trillion yen and about 90 billion yen, respectively.
The companies shown below by Francine will be increasingly influenced by this.
I will come to the waiting point later.
This is normally an issue for the military world and as I hinted at earlier there has been news on this front in an increasingly militarised Japan. From The Japan Times.
Japan on Friday became the fourth country to test-fly its own stealth jet….According to the Defense Ministry, the Advanced Technology Demonstrator, called X2, took off from Nagoya airport in Aichi Prefecture at 8:47 a.m. Friday morning.
I am not sure this bit of tub-thumping is entirely reassuring.
During World War II, Japan’s aerospace industry led the global competition with its Zero fighter.
The stealth theme does come into The Tokyo Whale story too.
While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors…….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.
More stealthy than the jet? Anyway in terms of individual holdings it would appear that the Bank of Japan is none to keen on us knowing. Mind you it might be one way of ensuring that Japanese firms raise wages! Buy all the shares and send a nominee to the public meetings to vote.
There are quite a few here so lets us run through them.
1. Shareholders are supposed to have a role in the strategy of a company so how will the Bank of Japan deal with this?
2. How does price discovery in the Nikkei 225 and Topix indices work when the Bank of Japan buys and presumably pushes prices higher? This creates a danger of the sort of false market central banks are supposed to be guardian against.
3. On that road how will the Bank of Japan regulate itself as an equity investor? Also what about other Japanese regulatory authorities.
4. Abenomics was supposed to be a break from “pork barrel” politics as we consider the now pretty much mythical thrid arrow. As the quote below shows it is buying what might be regarded as big industry’s shares or the sort of favouring reminiscent of Abe’s previous government.
The central bank’s use of large-cap ETFs means its positions are concentrated
5. The elephant in the room is of course the issue of how much all this buying has driven the stock market and in particular Japan’s big businesses higher? Whilst acolytes may argue it is only 1.6% of the market remember that there has been substantial net buying which is continuing. Where would the Nikkei 225 equity index be without this.
6. The rises in the Japanese equity indices are likely therefore to be affected by the principles of Goodhart’s Law and indeed the Lucas Critique.
7. Should losses be made will the Bank of Japan just print the money required and who will explain the consequences to the Japanese taxpayer?
It was only on Friday that news leaked about the Bank of Japan considering offering negative interest-rates on loans. This had an immediate impact on the Yen which at 111.3 versus the US Dollar is much weaker than before the news. Indeed speculation about Bank of Japan moves at its policy meeting are apposite to today’s article. From Bloomberg.
If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen — the pace predicted by Goldman Sachs Group Inc. — 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.
Care is needed with any forecast from the Vampire Squid which is usually for its benefit but I note that HSBC’s effort exceeds it considerably. At such a pace the Bank of Japan would soon become large even for a whale. The risk of unintended consequences gets larger as it grows along the lines of this consequence of the UK National Living Wage.
Salami slicing? Zizzi responds to living wage by cutting free staff food to margherita pizza or a plate of spaghetti ( @sarahoconnor_ )
There is also the issue of what I call the exit strategy from this or how you ever reverse it? I have argued many times that central banks have charged into QE style efforts with no plan for either retreat or even the consequences of victory.
Also will we in a few years time be saying the same about the property market in Japan as it seems likely to seem more central banking buying?
I will leave you with Alphaville who back in 1984 were rather prescient about the Bank of Japan.
When you’re big in Japan, tonight
Big in Japan, be tight
Big in Japan, oo the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan