It is party and sake time at The Tokyo Whale as the Nikkei 225 hits highs

This week has brought a succession of news which will be welcomed by supporters of what has become called Abenomics and the Bank of Japan in particular. In fact the Bank of Japan will be pleased in two ways, one as an ordinary central bank and the other in its hedge fund style role as the Tokyo Whale. From The Japan Times.

The benchmark Nikkei average rose further and marked another 21-year closing high on the Tokyo Stock Exchange on Thursday, boosted by Wall Street’s overnight advance. The Nikkei 225 average gained 73.45 points, or 0.35 percent, to end at 20,954.72 — the best finish since Nov. 29, 1996.

Today this has gone one step further or for Madness fans one step beyond,

Let us start with the most recent period from when Abenomics was first likely to be applied to now. In that time the Nikkei 225 equity index has risen from around 8000 to 21000. As this was one of the policy objectives as according to the mantra it leads to positive wealth effects for the economy it will be regarded as a success. It may also help oil the wheels in the ongoing Japanese election. But you see there is another reason for the Bank of Japan to be happy about this because since a trial effort back in 2010 it has been buying Japanese shares via Exchange Traded Funds. A more regular programme started in 2012 and this was boosted in size and scale over time and here is the current position from the September monetary policy statement.

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.

So the Bank of Japan will have some considerable paper profits right now especially in the light of a clear behavioural pattern which I looked at on the 6th of June.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

The Nikkei Asian Review analysed this development like this.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

There have been various rumours over the years about central banks providing something of a “put option” for equity markets leading to talk of a “plunge protection team”, well here is one literally in action. The Japanese taxpayer may reasonably wonder why it is supporting equity investors in yet another example of a policy which the 0.01% will welcome in particular. But for now let is move on with the Governor of the Bank of Japan enjoying a celebratory glass of sake as he looks at the wealth effects of the equity market high and the paper profits in the Bank’s coffers.

The “Put Option” in practice

A paper had been written by Toby Nangle and Tony Yates on this. You may well recall Tony Yates as the person I had a debate with on BBC Radio 4’s Moneybox programme and that events since have not been kind to his views. Anyway they tell us this.

 the cumulative purchases by the Bank of Japanese equities are becoming substantial. We estimate the market value to have been just below ¥20 trillion at the end of July 2017, or around 3.2% of the total Japanese stock market, making the central bank the second largest owner of Japanese stocks after the Government Pension Investment Fund.

Indeed they find themselves producing analysis along the lines of my “To Infinity! And Beyond!” theme.

Without further adjusting the pace of ETF purchases, we project that the central bank will own 10% of the market sometime between 2022-2026, depending on the interim market performance.

First they look for an announcement effect.

We control for this by examining the excess returns of Japanese stocks versus global stocks two business days post-announcement in common currency (last column in Table 1). The relationship between the scale of purchases and the price change is positive in each episode, although the confidence we have in the relationship is not strong given such few data points.

Personally I would also be looking at the days ahead of the announcement as many of these type of events are anticipated and if you like “front-run” these days. Next we see they look for an execution effect and they struggle to find one as the Japanese market underperformed in the period they looked at compared to other equity markets. However we do get a confirmation of the put option in operation.

 we find that the Bank of Japan has timed the execution of its ETF purchase programme to coincide with episodes of market weakness, potentially with the aim of dampening price volatility.

Oh and “dampening price volatility” is the new reduce and/or stop market falls as otherwise it would also sell on days of market strength.

Will it spread?

This is slightly dubious depending on how you regard the actions of the Swiss National Bank which of course buys equities abroad which I presume they regard as the difference.

Japan has been alone in purchasing equities as part of its monetary easing programme, and the question of whether the purchase of equity securities is the next step along this path is of wider interest.

But I agree with the conclusion.

 Even if central banks in the US/Eurozone/UK achieve a lasting lift-off from the zero bound, and are able to shed asset purchases from their balance sheet, low central bank rates are discounted by markets to be a fact of life for the next decade or two, and the chance of needing to have recourse to unconventional measures appears very large.


Thank you to Tony and Toby for their paper but they use very neutral language and avoid any opinion on whether this is a good idea which tends to suggest a form of approval. Yet there are a myriad of problems.

The ordinary Japanese taxpayer is very unlikely to be aware of this and what is being done both in their name and with their backing. This is especially important if we consider the exit door as in how does this end?

There is a moral hazard problem in both backing and financing a market which disproportionately benefits the already well off. This gets added to by the latest scandal in Japan as the company below has been ( indirectly) backed by the Bank of Japan.


There are real problems here and is one of the arguments against central banks buying risky assets of this form and the clue of course is in the use of the word risky.

Next we have the issue of what good does it do? Yes some get an increase in their paper wealth and some will take profits. In a sense good luck to them, but as we note that this will be disproportionately in favour of the wealthy this is in my opinion a perversion of the role of a central bank.

On the other side of the coin is the current media cheerleading for equity markets of which this from Bloomberg this morning is an especially disturbing example.

To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009. Aided by an 8 percent drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount — $20 trillion — that is comparable to the total value of all equities nine years ago……… And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

You see congratulating people on doing well out of equity investments is very different to saying you should buy now at what are higher prices. Unless of course Bloomberg thinks they are more attractive at higher prices in which case perhaps it should be buying Bitcoin. Let me leave you with this which feels like something out of a dystopian science fiction piece.

Big companies are becoming huge, from Apple Inc. to Alibaba Group Holding Ltd.


14 thoughts on “It is party and sake time at The Tokyo Whale as the Nikkei 225 hits highs

  1. Shaun, I note you won’t call this the top? And I understand why, if Govts are printing to buy equities then this could go on for a lot further, the Kobe case highlights that the businesses are nit necessarily better for the underwriting of their shares so where is the value?

    It seems a bit be wishing for fall but how we find out which businesses are sound?

    I guess that bigger problem is stasis, preservation lets cobwebs grow, there’s little real innovation or creative destruction.


    • Much of the ruins of Western (incl. Japan) Capitalism now, is where the ruins of Soviet “Communism”, was in the 1960s-early 1980s.
      It has abandoned all its ideology and now its corpse is preserved only for the benefit of the elite.
      Let’s hope it ends better than a corrupt oligarchy, and that a visionary, democratic leader like Putin emerges to save us from ruin.

      • Under the Soviets, the workers used to say “You pretend to pay us, so we [pretend to work”, which is what is happening to the Uk economy at least.

    • Hi Paul C

      One of the scenarios I saw early in the credit crunch era was from Societe Generale if I remember correctly and it posited a road where the Nikkei 225 went to 60,000. The only catch was that the 60,000 did not buy you much……

      On another topic I was watching BBC Business News the other day and on came a chap plugging the merits of modular pre-fabricated housing.

  2. The interference by central bankers in stock and bond markets is disgraceful, but at least the Japanese are open about it, as opposed to the Fed which has been behind several important reversals in the stockmarket since 2009, not just by providing QE at the critical moment but buying massively when it looked like the market was going into freefall. Many suspect they are even micro managing daily or intraday reversals. This has set up the conditions for the next phase of the next bubble as even the most negative or bearish participants have all but given up shorting the market only to have it promptly reverse and stop them out, you can only do this so many times before either running out of money or going literally mad.

    Then there are unsophisticated retail investors who have seen the market go up week after week, month after month, year after year for eight years in a row now and realised that it NEVER GOES DOWN, and any pullbacks are getting smaller and smaller(a sign buyers are increasingly desperate to go long regardless of risk or fundamentals – fear of missing out in other words – the classic catalyst for a bubble. They have heard through various media the sayings “the Fed has got your back”, “the Fed wants the market to go up – it’s called the wealth effect”, and so they think this is government sanctioned free money.

    And so the Fed has induced yet another bubble. And one of their mandates is “price stability” – so who exactly is calling them out on this cycle of monetary policies that create bubble after bubble that leads to further polices to rescue markets after the inevitable bust, that leads directly and indirectly to the next bubbble?

    • Hi Kevin

      I agree completely about there being a Fed driven bubble and today has already brought a familiar refrain from CNBC.

      “U.S. stocks reached record highs on Friday as investors bet on another strong earnings season.”

      If the US stock market started to see sustained falls then I would not be surprised to see the US Fed join the Bank of Japan in buying and holding equities.

    • “as opposed to the Fed which has been behind several important reversals in the stockmarket since 2009, not just by providing QE at the critical moment but buying massively when it looked like the market was going into freefall”

      May I see any evidence to back this claim?

  3. “You see congratulating people on doing well out of equity investments is very different to saying you should buy now at what are higher prices.”

    You appear to be calling the top of the market – why?

    • ETf’s funding derives from the stock market, just like an Investment Trust, you are buying/selling direct to the market..

      If you prefer an OEIC or Unit Trust as they usually keep spare cash to buy their shares/units back off you then in the case of a market crash this may save you for a few days until their liquidity runs out and they freeze trading in their shares/units . It’s a fallacy to think ETF’s are massively risky (unless you’ve bought an ETF with the sole intention of shorting it or taking options on it) whilst OEIC’s/Investment Trusts are safe. They are simply slightly more stable but in the event of a run – forget it.

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