The Tokyo Whale will be very happy today as the Nikkei hits a 3 decade high

This morning has brought news that will make the Bank of Japan happy and indeed given us a step forwards for the Abenomics strategy.

Japan’s Nikkei 225 Stock Average climbed Tuesday as a rally in technology companies helped push the blue-chip gauge to its highest level since the nation’s bubble economy era more than three decades ago.

The gauge rose 1.2% to close at 33,763.18 in Tokyo, a level unseen since March 1990, after the Nasdaq 100 Index rebounded from last week’s slump and U.S. Treasury yields dropped. The benchmark Topix index, which some funds prefer to follow because it’s more comprehensive, gained 0.8%. ( The Japan Times)

The reason for this is that the Bank of Japan began buying equities and it whilst it was not one of the formal arrows of Abenomics it became a feature of what we now call QQE ( Quantitative and Qualitative Easing). When it bought more in response to the Covid pandemic it passed the government pension fund and became the largest owner of Japanese equities. According to its end of year accounts the book value was 37.2 trillion Yen. The actual position on a mark to market basis is much better as this from Reuters shows.

The BOJ’s ETF holdings as of March 2023 stood at 37 trillion yen ($265.75 billion) in book value, and 53 trillion yen in market value, according to the central bank’s earnings data.

Just taking a rough rule of thumb from levels back then puts its holdings above 60 trillion Yen at this morning’s levels. If we look back we see that it piled into the market post Covid as described below by the Financial Times in March 2020.

The Bank of Japan took its controversial equity-buying programme deeper into uncharted territory on Monday, doubling its annual purchasing target to ¥12tn ($112bn)

If we return to The Japan Times I find it interesting that the Bank of Japan buying does not get a mention.

The Nikkei 225’s fresh three-decade high wasn’t a surprise given that “Japanese stocks have been cheap for a long time, along with corporate governance reforms and the effect of Warren Buffett from last year,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, referring to the Berkshire Hathaway chairman’s increasing his stockholding in Japanese trading firms.

It does pose something of a question though because there is a sort of implied logic from the words of Sera San that central banks might pick up. Should they buy equities which are cheap? Of course we immediately hit the issue of how you would define cheap.

Japanese Government Bonds

This is a much more usual policy for a central bank these days. But the Bank of Japan was the first to start large-scale purchases and it has done so with such enthusiasm that it holds some 592.2 trillion of them as of the end of 2023. I note that this morning’s financial news tells us this.

The Bank of Japan announced buying of 10-year to 25-year debt that suggested it will purchase less of those bonds in all of January, in line with what it signaled late last year. ( Bloomberg )

You may note the framing as we are guided towards it buying less when perhaps the real news is that it continues to buy at all. After all the other major central banks are either setting out plans to reduce their holdings or actively selling some of them as the Bank of England did yesterday. Whereas in Japan we see this.

Bank of Japan now owns almost 60% of Japanese government bonds. ( @GameofTrades )

This poses a question at a time of higher bond yields as the value of the portfolio drops. Back on the 2nd of October last year I noted that it took Governor Ueda some 26 pages to cover the issue.

First, the Bank’s income has been on an increasing trend.
Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs. In addition, the dividends received from its holdings of ETFs and other assets have grown to a sizable amount over the past few years.

As you can see he was putting a positive spin on things and from the point of view of the equity holdings things look all gravy as we have dividend income to add to the mark to market profits. But the JGB position not so much.

TOKYO — The Bank of Japan’s unrealized losses on its Japanese government bond holdings swelled to 10.5 trillion yen ($71.2 billion) at the end of September, according to financial statements released Tuesday, as rising yields dragged down bond prices.
This marked the central bank’s third straight half-year paper loss on JGBs, and the largest since it began valuing them under its current method in 2004, ( Nikkei Asia )

This has been a concern for the Bank of Japan as its latest official Minutes show.

On this basis, some members expressed the view
that, although the Bank’s profits could be subject to downward pressure temporarily, it was
important to explain clearly to the public that such developments in profits would not set a
limit on the Bank’s conduct of appropriate monetary policy to achieve price stability.

Ah “temporarily!” You might think that central bankers would now avoid that word.

However things have so far pretty much gone its way. What I mean by that is that if we use the March futures contract we see the price dipped below 147 overnight. But that is not much different to this time last year. For all the news about changes in bond yields there has been something which Elvis sang about.

A little less conversation, a little more action, please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark

Whilst other bond markets took punishment in 2023 Japan managed to dodge much of it. There are losses here in that it bought as high as 155 or so in futures terms after the pandemic but they are so far relatively small and the position is oiled by the fact that Japan has a negative interest-rate. So buying produces a yield of 0.61% to which we add the negative interest-rate of 0.1%.

Thus The Tokyo Whale has dodged something of a bullet here so far at least. Putting it another way whilst being short the Japanese bond market is no longer the “widow maker” it was you would have been better off pretty much in every other bond market.

Japanese Yen

I thought I would add this is as whilst exchange rate intervention is explicitly on behalf of the finance ministry it is part of what we might call Japan Inc. Here things have begun to look a fair bit brighter as I pointed out on the 7th of December the winds of change were blowing in Japan’s favour. At an exchange rate of 144 to the US Dollar the situation is for now calmer and the intervention is making a small profit.

Comment

If we look at the present situation the Bank of Japan can not only have a wry smile it can have something of a beam. The equity position is presently going from strength to strength and the bond position had a much better 2023 than it might have done. Even the foreign exchange market has begun to move favourably. Switching from the financial to the real economy this morning saw another move in the right direction.

The headline inflation rate for Japan’s capital city of Tokyo slowed to 2.4% in December, from 2.6% in the month before.

Inflation rate has declined for a second straight month and is at its lowest level in 18 months. ( CNBC )

However there is a shark in the water which is the balance sheet risk. Whilst the Bank of Japan has equity profits how does it ever take them? Who will be willing to buy that much of the market when the central bank is selling? Outright sales of assets are not going so well if the Bank of England is any guide. After all the market price reflects ordinary volumes not one enormous seller.

Next up is the risk created by the enormous position in the bond market which is that in both absolute and relative terms. Should the grip of The Tokyo Whale loosen then it would look awful pretty quickly. Putting it another way then I find it revealing that the Japanese owned Financial Times omits Japan in the article below.

Investors warn governments about high levels of public debt

The Tokyo Whale will be be celebrating with the Nikkei 225 over 30,000

The news that the Nikkei 225 equity index has rallied above 30,000 has not received the attention it deserves. It has got somewhat drowned in the news of other equity market highs. But it has a national significance as well as having been different in terms of how it has been engineered. The national significance comes from the fact that at the end of the Japanese boom in 1989 it reached 38,957.44 on an intra-day basis. Then it plunged and has never recovered. Indeed before the period of Abenomics which I will come to in a moment it had fallen below 10,000 as it started this rally from around 8500. So we see a feature of what has become called the Lost Decade which has stretched into decades.Also we see something which will have impacted on Japanese face culture. Along the way it also rather blew up arguments for pound cost averaging in equity investing.

The Tokyo Whale

This part of the story starts with the move to negative interest-rates and the additional QE bond purchases of the Bank of Japan under Governor Kuroda. But in spite of the enormous amount of central intervention here which now includes controlling the yields of Japanese Government Bonds under Yield Curve Control this is only something of a bit part player.

This is because the Bank of Japan added something unique to the QE mix which is home equity purchases in size. It had bought some equities after the credit crunch but quickly the new programme was buying more a year than the previous total target. So like a hedge fund except it never sells and like the Swiss National Bank except it buys overseas mostly US equities to hedge its large foreign exchange holdings. Abenomics also changed the name to Quantitative and Qualitative Easing or QQE as the previous name of QE had had around 19 iterations or if you prefer failures.

Next inline with my “More,More.More” theme the purchase rate was doubled to 6 trillion Yen a year in September 2016. At this point we really do have a PPT or Plunge Protection Team in operation. Or if you prefer an explicit put option for Japanese equity markets as purchases were not only made when the index fell everybody knew they were going to be made.

When the pandemic hit we got a much more explicit put option as shown below by this from last week’s Bank of Japan working paper.

Based on these guidelines, the Bank adjusted the purchase amount each time in a timely manner. Specifically, the Bank conducted purchases of around 200 billion yen per auction from March 19, 2020 through the end of March, and purchases of around 50 to 120 billion yen from the beginning of fiscal 2020, in accordance with market conditions.

If we look back we see that the Nikkei 225 had more than doubled under Abenomics but the panic of March 19 2020 had seen it fall back to just below 16.400. So the Japanese cavalry arrived in the form of The Tokyo Whale which was hungry.

In particular, the purchase amount exceeded 1 trillion yen in April 2020 (1,227.2 billion yen), following the results in March 2020(1,548.4 billion yen).

This led to this.

The above operations by the Bank amounted to 56 purchases (excluding purchases of ETFs
composed of stocks issued by “firms that are proactively investing in physical and human capital”
carried out every business day) during fiscal 2020. These resulted in the amount outstanding of
ETFs purchased by the Bank at the end of March 2021 standing at 35.9 trillion yen.

As of the end of August the Bank of Japan account show it to be 36.2 trillion and I recall it buying around the 28,000 level.

Economic Growth

If you thought this was about economic growth then you might get a shock from the July Monetary Report.

The potential growth rate seems to have been at
around 0 percent or marginally positive recently,
although total factor productivity (TFP) has slightly
picked up

Much has changed since July so let us look at the Markit survey from earlier this month.

The au Jibun Bank Japan Composite* PMI Output Index – which measures combined output in the manufacturing and service sectors – fell to 45.5 in August from 48.8 in July to signal an accelerated deterioration in Japanese private sector output.

The future did not look too bright either.

Aggregate new orders were also reduced at a quicker rate, with the pace of decrease the quickest since January. The fall in services demand was the quickest since May 2020, while growth of manufacturing orders also eased.

There were the Covid-19 outbreaks which put a brake on things but fortunately the numbers now look to be falling. Also it may be a surprise to new readers but it is in fact typical of Japan that the vaccination programme was handled badly and has been slow.

Returning to the economic growth issue we need to remind ourselves that the Japanese economy was shrinking before the pandemic as it struggled with the consequences of the rise in the Consumption Tax.

Inflation

This was the headline indicator for Abenomics where deflation was pretty much defined around the lack of inflation. How is that going according to the Bank of Japan.

The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is likely to be at around 0 percent in the short run.

We can get some more up to date numbers and the Tokyo ones are seen as a forerunner for the national ones.

The consumer price index for Ku-area of Tokyo in August 2021 (preliminary) was 99.7 (2020=100), down 0.4% over the year before seasonal adjustment, and down 0.3% from the previous month on a seasonally adjusted basis.

Amazing really when we see signs of inflation pretty much everywhere else. But sticking to today’s theme equity purchases have not impacted on consumer inflation at all.

Comment

In contrast to the failures in other policy areas such as economic growth and consumer inflation we have seen the Japanese equity market nearly quadruple over the Abenomics equity purchases era. This has led to large windfalls for both domestic and international investors. The latter will be grateful for the fact that the Yen stopped offsetting the moves some time back.

So we are in fact observing an enormous wealth transfer to those who own assets who in general will already be well-off. The problem is that it does not look to have impacted the economy at all and the Bank of Japan is left with enormous holdings that it cannot sell.

I see that Reuters is predicting an end but I would refer you to the bit that they still promise to buy if the market falls as even the Bank of Japan cannot justify buying at 30k.

Last year, an opportunity arose: after ramping up buying to ease market turbulence caused by the pandemic, the BOJ began to scale back purchases and found markets taking the tapering in stride.

That convinced BOJ officials the bank could terminate buying without upending markets, as long as it gave assurances that it would still intervene in times of crisis.

If we switch to all its bond purchases how is that going?

JAPAN 10-YEAR BOND FAILS TO TRADE FOR FIRST TIME IN A MONTH ( @farrisbaba )

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What happens when a central bank becomes a hedge fund?

It is a sign of the times that we need to sub divide the intervention by central banks but we do. So today I will not be looking at the sovereign bond buying of which, for example, the Bank of England will deploy some £1.473 billion this afternoon. As this is state to state action although some still live in a sort of delirium where the central bank independently does this.

What I am referring to is where the central bank buys private-sector assets. For example if I switch to the European Central Bank or ECB then in its latest published weekly data it bought three types of private-sector bond. The largest has been of Covered Bonds of which the various programmes total  290 billion Euros with 1.5 billion bought that week. Oh and you will not be surprised to learn that this went on well before the ECB started general QE and it benefits the banks.

 A bank sells a number of investments that produce cash, typically mortgages or public sector loans, to a financial institution. That company then assembles the investments into packages and issues them as bonds. ( Investopaedia)

A rather similar effort is the purchase of asset back securities about which you may recall ECB President Mario Draghi making quite a song and dance a few years back. Anyway in spite of the hype this has not amount to much in the general scheme of things at 30 billion Euros and 600 million added in the week.

It is hard not to have a wry smile as I note the purchases across the rest of the economy are smaller than those to help The Precious! The Precious! As the corporate bond programme totals some 247 billion Euros with 1.9 billion bough that week.

The issue here is twofold. The ECB is exposing itself to a genuine risk of loss and it is favouring some parts of the economy over others. That starts with favouring the banks and moves onto helping larger rather than smaller companies leading to more risk of Zombification. All of that gets a much bigger risk of the central bank sings along with David Bowie.

Fashion, turn to the left
Fashion, turn to the right
Ooh fashion
We are the goon squad and we’re coming to town
Beep-beep, beep-beep

Here is Isabel Schabel from late August.

One idea that I have been pushing a bit in recent months is the idea of a green capital markets union. The idea is to combine the whole reform process for capital markets union with the green transition. I think there is a huge potential there for Europe. It would help a lot and would also – in an uncontroversial way – allow us to buy more green bonds.

What could go wrong? Especially as she seems to think she and her colleagues know better than financial markets.

 And there is the alternative view that markets are not pricing climate risks properly, so there is a market distortion.

Equity Purchases

Bank of Japan

These add a new level of risk as at least in theory bonds offer more protection for an unwary central bank. So let me start with what brought this subject to my mind today.

Tokyo’s benchmark stock index started December in some style. The Nikkei Average enjoyed its highest close since April 1991.

The index ended Tuesday at 26,787, up 1.3 percent from Monday’s close. Investors placed buy orders in a wide range of sectors from the opening.

Tuesday’s bounce came after news that US pharmaceutical firm Moderna has sought regulatory approval for its COVID vaccine. They say it was 94 percent effective in clinical trials.

The strong start to December followed a month that had the Nikkei firing on all cylinders.

Vaccine news and the US election result helped boost the index by 15 percent. ( NHK News)

So the Nikkei 225 index had a pretty stellar November and that theme has continued today. However we learn something by noting that even a month where it rose by 15% the central planners at the Bank of Japan still felt the need to buy equities twice as they bought a bit over 70 billion Yen on the 13th and the 18th. This is a road to a situation where their equity holdings now exceed 35 trillion Yen which is why I have described it as The Tokyo Whale in the past. Putting that into context that is the equivalent of owning Toyota which is Japan’s largest company more than one and a half times.

The Bank of Japan acts passively and buys exchange traded funds ( ETFs) aiming to match the Nikkei 400 index.So with the concentration of equity markets these days it will not be much different to the 225 index as even in it the smallest 40 rarely traded even in my time working there. It also buys smaller amounts ( 1.2 billion Yen) of both commercial property REITs and equities to promote physical and human capital. In fact it does the latter most days.

For those of you unaware of this I guess I have given you a completely different perspective on the Japanese stock market and in particular on its rise.

Swiss National Bank

It too is an equity buyer but this time of foreign equity as its road to here was via its enormous foreign exchange interventions as it has battled the rise of the Swiss Franc. Remember the days when it promised and indeed boasted that its interventions would be “unlimited”. Well it piled in so much it found itself with a problem in the conventional way of hedging this. This is because the scale meant it was distorting Euro area bond markets for example as we mull it competing with the ECB. So its brains trust came up with the idea of buying equities which has turned out to be mostly in the United States.

The equity portfolios in the foreign exchange reserves comprise of shares of mid-cap and large-cap companies in advanced economies and, to a lesser extent, shares of small-cap companies, as well as shares of companies in emerging economies.The SNB does not engage in equity selection; it only invests passively. ( SNB)

You may note that the investment seems guided at first but then switches to pretty much anything. I can however give you a pointer to the US holdings from the SEC data.

As of 2020-09-30, the fund was valued at $127,874,338,000.

With the US market hitting new highs that will have risen since then. Also here are its main holdings there.

According to SNB filings to the end of July, a third of its $125 billion equity portfolio were held in technology stocks. Some 5% of the SNB’s holdings were in Apple shares alone – its single biggest investment – and 18% of its equity stash was in the top five U.S. tech giants.

Something that may get Swiss watchmakers a little hot under the collar is their central bank’s large stake in the producer of the Apple Watch.

Comment

One theme here is the fact that it is the countries I described back in the day as the “Currency Twins” who are at the outer limits of central bank action here. Although there is a nuance in that the SNB is the one explicitly playing the currency game whereas The Tokyo Whale is only playing it implicitly, But there are joint dangers here.

1. Risk of bankruptcy of a share holding. That is fresh in my mind today via the collapse of Arcadia in the UK although as a private company it was different.
2. What do central bankers know about equity market investment?
3. How do they ever stop and one day reverse course?
4. How does this fulfill their mandate?

There are differences as the SNB has the advantage of playing in a much larger market whereas the Bank of Japan is more like Gulliver in Lilliput. How can it exit its own equity market and who would it be able to sell to? As it continues to buy more we get another perspective as it gets ever more unable to retreat.

In conclusion the wider danger is that other central banks get in on the same game as they spot that in relative terms UK and Euro area equity markets have underperformed.

 

It is party time at The Tokyo Whale as the Japanese stock market surges

Sometimes you have to wait for things and be patient and this morning has seen an example of that. If we look east to the and of the rising sun we see that it has been a while since it was at the level below.

Japan’s Nikkei 225 stock index closed on Friday at its highest level since November 1991 as individual investors bought up the shares of blue-chip companies at the expense of smaller, more speculative groups. The benchmark, which has been described by some analysts as a “barbarous relic” but remains the favourite yardstick of Japanese retail investors, was propelled to its 29-year high by resurgent stocks like Sony, SoftBank and Uniqlo parent Fast Retailing.

That is from the Financial Times over the weekend and its Japanese owners will no doubt be pointing out that it should be covering this morning’s further rally.

Investing.com – Japan stocks were higher after the close on Monday, as gains in the Paper & Pulp, Railway & Bus and Real Estate sectors led shares higher.

At the close in Tokyo, the Nikkei 225 rose 2.12% to hit a new 5-year high.

Curiously Investing.com does not seem to have spotted that we have not been here for much longer than 5 years. The market even challenged 25,000 but did not quite make it.

There was something familiar about this but also something new as the FT explained.

Mizuho Securities chief equity strategist Masatoshi Kikuchi said that the Nikkei’s move was driven by individual investors using leverage to magnify their potential returns and losses — a much larger and more active group since the Covid-19 pandemic restricted millions to their homes and prompted many to open online trading accounts.

The Japanese are savers and investors hence the Mrs. Watanabe stereotype but the gearing here reminds us of the Robinhood style investors in the US as well.

The Tokyo Whale

As ever if we look below the surface there has been much more going on and we can start at the Bank of Japan which regular readers will be aware has been buying equities for a while now.Also it increased its purchases in response to the Covid-19 pandemic in two ways. It did not just buy on down days and it also increased its clip size.

For the time being, it would actively purchase ETFs and J-REITs so that their amounts outstanding would increase
at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively. ( Bank of Japan Minutes)

In October it bought 70 billion Yen’s worth on six occasions and on three days in a row from the 28th. If we recall that world stock markets were falling back then we find ourselves noting the most extreme version of a central bank put option for equity markets we have seen so far. Indeed this is confirmed in the Minutes.

With a view to lowering risk premia of asset prices in an appropriate manner, the Bank might increase or
decrease the amount of purchases, depending on market conditions.

What is appropriate and how do they decide? This morning’s summary of opinions release suggests that some at the Bank of Japan are troubled by all of this. The emphasis is mine.

It is necessary to continue with active purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) for the time being. However, given that monetary easing is expected to be prolonged, the Bank should further look for ways to enhance sustainability of the policy measure so that it will not face difficulty in conducting such purchases when a lowering of risk premia of asset prices is absolutely necessary.

As “monetary easing” has been going on for around 3 decades now it has already been very prolonged. I wonder on what grounds they would regard it as “absolutely necessary” to reduce the value of its large equity holdings. As of the end of October it had bought some 34,771,759,339,000 Yen of it.

Rather curiously the Bank of Japan share price has not responded to the rise in value of its equity holdings. Yes it was up 1.9% today to 26,780 but that is a long way short of the 220,000 or so of November 1991.

The Bank is a juridical person established based on the Bank of Japan Act. Its stated capital is 100 million yen. The issued share capital is owned by the government (55 percent) and the private sector (45 percent).

Abenomics

There is something of an irony in this landmark being reached after Prime Minister Abe has left office. Because as well as the explicit equity buying effort above there were a lot of implicit boosts for the equity market from what became called Abenomics. Back in November 2012 I put it like this.

Also the Japanese stock market has had a good couple of days in response to this and has got back above the 9000 level on the Nikkei 225 at a time when other stock markets have fallen.

As you can see the market has been singing along to Chic in the Abenomics era.

Good times, these are the good times
Leave your cares behind, these are the good times
Good times, these are the good times
Our new state of mind, these are the good times
Happy days are here again
The time is right for makin’ friends.

We have seen interest-rates reduced into negative territory and the Bank of Japan gorge itself on Japanese Government Bonds both of which make any equity dividends more attractive. Also there was the Abenomics “arrow” designed to reduce the value of the Japanese Yen and make Japan’s exporters more competitive. Often the Japanese stock market is the reverse of that day’s move in the Yen but in reverse so Yen down means stick market up.

The latter gave things quite a push at first as the exchange-rate to the US Dollar went from 78 into the mid 120s for a while. However in more recent times the Yen has been mimicking The Terminator by saying “I’ll be back” and is at 103.60 as I type this. There is a lot of food for thought here on the impact of QE on a currency but for our purposes today we see that the currency is weaker but by much less than one might have thought.

Comment

The Japanese stock market has recently received boost from other influences. For example what is becoming called the “Biden Bounce” has seen the Nikkei 225 rally by around 8% in a week. Also this morning’s data with the leading indicator for September rising to 92.9 will have helped. But also we have seen an extraordinary effort by the Japanese state to get the market up over the past 8 years. In itself it has been a success but it does raise problems.

The first is that Japan’s economic problems have not gone away as a result of this. Even if we out the Covid pandemic to one side the economy was struggling in response to the Consumption Tax rise of last autumn. The official objective of raising the inflation rate has got no nearer and the “lost decade” rumbles on. The 0.1% have got a lot wealthier though.

Then there is the issue of an exit strategy, because if The Tokyo Whale stops buying and the market drops there are two problems. First for the value of the Bank of Japan’s holdings and next for the economy itself. So as so often we find ourselves singing along with Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

Meanwhile on a personal level I recall these days as I worked for Barings pre collapse.

Baring Nikkei options in the money now! ( @WildboyMarkets)

Indeed I had an indirect role as there were 4 of us on the futures and options desk and we feared trouble and left. So they promoted Nick Leeson from the back office and what happened next became famous even leading to a film.

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The Tokyo Whale is hungry again!

A new week has started with something which we will find awfully familiar although not everyone will as I will explain. But first let me give you something of a counterpoint and indeed irony to the news.

SINGAPORE (Reuters) – Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. [EIA/S]

In ordinary times this would be a case of let’s get this party started in Japan. This is because it is a large energy importer and thus it would be getting both and balance of payments and manufacturing boost. In itself it would have been extremely welcome because you may recall that its economy had seen a reverse before the present pandemic.

The contraction of Japan’s 4Q 2019 GDP was worse than expected, coming in at -1.8% q/q (- 7.1% annualized rate) versus the first estimate of -1.6% q/q (-6.3% annualized rate) as the contraction in business spending was deeper than what was first reported in February, ( FXStreet )

So the land of the rising sun or Nihon was already in what Taylor Swift would call “trouble, trouble,trouble”, The raising of the Consumption Tax ( what we call VAT) had in an unfortunate coincidence combined with the 2019 trade war. The former was rather like 2014 as we mull all the promises it would not be. Also let me give you a real undercut, Japan acted to improve its fiscal position just in time for it to be considered much less important.

The Tokyo Whale

Let me open with something which for newer readers may come as a shock.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

Yes the Bank of Japan is buying equities and has just suggested it will double its annual purchases of them. Those who follow me will be aware it has been buying more as for example it is now buying around 120 billion Yen on the days it buys ( nine so far in April) as opposed to the previous 70 billion or so having bought over 200 billion when equity markets were hit hard. The detail is that it buys via Exchange Traded Funds ( ETFs) to avoid the embarrassment of having to vote at AGMs and the like.

Oh and in another familiar theme upper limits are not always upper limits.

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.

Also the ,you may note that the limit for commercial property purchases has been doubled too. I do sometimes wonder why they bother with the commercial property buys although now we have an extra factor which is that in so many places around the world commercial property looks under a lot of pressure. For example if there is more working from home as seems likely.

The Precious! The Precious!

Japan has an official interest-rate of -0.1% but not for quite everybody.

(3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this
operation.

For whom?

Twice as much as the amounts outstanding of the loans will continue to be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.

Yes the banks and as you can see they will be a “double-bubble” gain from lending under the new Bank of Japan scheme. I wonder if the Japanese taxpayer has noted that extension of operations to the private debt sphere as well?

expand the range of eligible collateral to private debt in general, including household debt (from about 8
trillion yen to about 23 trillion yen as of end-March 2020),

Corporate Bonds and Commercial Paper

I have highlighted another risk being taken on behalf of the Japanese taxpayer.

The Bank decided, by a unanimous vote, to significantly increase the maximum amount
of additional purchases of CP and corporate bonds and conduct purchases with the upper
limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer’s CP and corporate bonds to be purchased will be raised substantially.

Should there be a default there might be trouble.

The Bank will increase the maximum share of the Bank’s holdings of CP and corporate
bonds within the total amount outstanding of issuance by a single issuer from the current
25 percent to 50 percent and 30 percent, respectively.

Surely at any sign of trouble everyone will simply sell to the Bank of Japan which will then be a buyer of more like first than last resort.

Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here ( The Eagles )

Japanese Government Bonds

This is something we have been expecting and just as a reminder the previous target was between 70 and 80 trillion Yen a year.

The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

It is hard to get too worked up about that as we have been expecting it to be along. In theory the plan remains the same, although there is a slight shuffle as in the past they have indicated a range between 0% and -0.1%.

Comment

The first issue is that the Japanese economy is doing extremely badly. It already had problems and the PMI business survey suggested a GDP decline of the order of 10%. With its “face” culture that is likely to be an underestimate. In response there has been this.

The Japanese government has outlined details of its plan to hand out 100,000 yen, or more than 900 dollars, in cash to all residents as part of its economic response to the coronavirus outbreak.

The cash handouts will go to every person listed on Japan’s Basic Resident Register, regardless of nationality. ( NHK)

They tried something like this back in the 90s and I remember calculating it as £142 as compared to £752 this time. As to adjusting for inflation well in the Lost Decade era Japan has seen so little of that.

So we see that the Bank of Japan is underwriting the spending plans of the Japanese government which of course is the same Japanese government which underwrites the bond buying of the Bank of Japan! It seems set to make sure that the Japanese government can borrow for free in terms of yield as I note this.

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

In fact just like a parent speaking to a child you can indulge in the JGB market but only if you play nicely.

While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

You will find many cheering “Yield Curve Control” although more than a few of those will be hoping that there claims that the Bank of Japan will need to intervene less have been forgotten. Actually there have been phases where it has kept yields up rather than down.

In the future will the Bank of Japan own everything?

The Express

I have done some interviews for it recently and here is one on the benefits of lower oil prices

https://www.express.co.uk/finance/city/1272278/coronavirus-news-oil-prices-negative-inflation-uk-wages-spt

Podcast on central bank equity purchases

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast76

 

How much difference has the central planning of the Bank of Japan really made?

Sometimes it is hard not to have a wry smile at market developments and how they play out. For example the way that equity markets have returned to falling again has been blamed on the Italian bond market which has rallied since Friday. But this morning has brought a reminder that even central banks have bad days as we note that the Nikkei 225 equity index in Japan has fallen 2.7% or 609 points today. This means that the Bank of Japan will have been busy as it concentrates its buying of equity Exchange Traded Funds or ETFs on down days and if you don’t buy on a day like this when will you? This means it is all very different from the end of September when the Wall Street Journal reported this.

The Nikkei 225 hit 24286.10, the highest intraday level since November 1991—as Japan’s epic 1980s boom was unraveling and giving way to decades of economic stagnation and flat or falling prices. It closed up 1.4% at 24120.04, a fresh eight-month high. The index has more than doubled since Shinzo Abe became prime minister in late 2012, pushing a program of corporate overhaul, economic revitalization, and super-easy monetary policy.

If you are questioning the “corporate overhaul” and “economic revitalization” well so am I. However missing from the WSJ was the role of the Bank of Japan in this as it has reminded us this morning as its balance sheet shows some 21,795,753,836,000 Yen worth of equity ETF holdings. Actually that is not its full holding as there are others tucked away elsewhere. But even the Japanese owned Financial Times thinks this is a problem for corporate overhaul rather than pursuing it.

According to one brokerage calculation, the BoJ has become a top-10 shareholder in about 70 per cent of shares in the Tokyo Stock Exchange first section. Because it does not vote on those shares, nor insists that ETF fund managers do so on its behalf, proponents of better corporate governance see the scheme as diluting shareholder pressure on companies.

Intriguingly the Financial Times article was about the Bank of Japan doing a stealth taper of these purchases but rather oddly pointed out it had in fact over purchased them.Oh Well!

In early July, for example, analysts noted that over the first 124 trading days of the 245-day trading year, the BoJ had bought ETFs that annualised at a pace of ¥7tn — or ¥1tn ahead of target.

That seems to explain a reduction in purchases quite easily. Anyway, moving back to the Bank of Japan’s obsession with manipulating markets goes on as you can see from this earlier.

BoJ Gov Kuroda: Told Japan Gvt Panel He Will Continue TO Monitor Market Moves – RTRS Citing Gvt Official $USDJPY  ( @LiveSquawk )

It was especially revealing that he was discussing the currency which is not far off where it was a year ago. Mind you I guess that is the problem! It is also true that the Yen tends to strengthen in what are called “risk-off” phases as markets adjust in case Japan repatriates any of its large amount of investments placed abroad.

Putting it another way to could say that the Japanese state has built up a large national debt which could be financed by the large foreign currency investments of its private-sector.

Monetary Base

This has been what the Bank of Japan has been expanding in the Abenomics era and it is best expressed I think with the latest number.

504.580.000.000.000 Yen

Inflation

All the buying above was supposed to create consumer inflation which was supposed to reflate the economy and bring the Abenomics miracle. Except it got rather stuck at the create consumer inflation bit. Just for clarity I do not mean asset price inflation of which both Japanese bonds and equities have seen plenty of and has boosted the same corporate Japan that we keep being told this is not for. But in a broad sweep Japan has in fact seen no consumer inflation. If we look at the annual changes beginning in 2011 we see -0.3%,0%,0.4%,2.7%,0.8%,-0.1% and 0.5% in 2017. For those of you thinking I have got you Shaun about 2014 that was the raising of the Consumption Tax which is an issue for consumers in Japan but was not driven by the monetary policy.

In terms of the international comparisons presented by Japan Statistics it is noticeable how much lower inflation has been over this period than in Korea and China or its peers. In fact the country it looks nearest too is Italy which reminds us that there are more similarities between the two countries economies than you might think with the big difference being Italy’s population growth meaning that the performance per capita or per head is therefore very different to Japan.

Bringing it up to date whilst we observe most countries for better or worse ( mostly worse in my opinion) achieving their inflation target Japan is at 1.2% so still below. Considering how much energy it imports and adding the rise in the oil price we have seen that is quite remarkable, but also an Abenomics failure.

The Bank of Japan loves to torture the data and today has published its latest research on inflation without food, without food and energy, Trimmed mean, weighted median, mode and a diffusion index. These essentially tell us that food prices ebb and flow and that the inflation rate of ~0% is er ~0% however you try to spin it.

Trade

Here Japan looks as though it is doing well. According to research released earlier Japan saw real exports rise by 2.5% in 2016 and by 6.4% in 2017 although more recently there has been a dip. A big driver has been exports to China which rose by 14.1% last year and intriguingly there was a warning about the emerging economies as exports to there had struggled overall and have now turned lower quite sharply.

Comment

As you can see from the numbers above the Bank of Japan has taken central planning to new heights. Even it has to admit that such a policy has side-effects.

Risk-taking in Japan’s financial sector hit a near three-decade high in the April-September, a central bank gauge showed, in a sign years of ultra-easy monetary policy may be overheating some parts of the industry…………The index measuring excess risk-taking showed such financial activity was at its highest level since 1990, when Japan experienced the burst of an asset-inflated bubble.

One of the extraordinary consequences of all this is that in many ways Japanese economic life has continued pretty much as before. The population ages and shrinks and the per head performance is better than the aggregate one. If things go wrong the Japanese via their concept of face simply ignore the issue and carry on as the World Economic Forum has inadvertently shown us today.

What a flooded Japanese airport tells us about rising sea levels

You see Kansai airport in Osaka was supposed to be a triumph of Japan’s ability to build an airport in the sea. To some extent this defied the reality that it is both a typhoon and an earthquake zone. But even worse due to a problem with the surveys the airport began to sink of its own accord, and by much more than expected/hoped. I recall worries that it might be insoluble as giving it a bigger base would add to the weight meaning it would then sink faster! Also some were calculating how much each Jumbo Jet landing would make it sink further. So in some respects it is good news that they have fudged their way such that it still exists at all.

Here is another feature of Japanese life from a foreign or gaijin journalist writing in The Japan Times.

If you’re a conspicuous non-Japanese living here who rides the trains or buses, or goes to cafes or anywhere in public where Japanese people have the choice of sitting beside you or sitting elsewhere, then you’ve likely experienced the empty-seat phenomenon with varying frequency and intensity.

Just as a reminder Japanese public travel is very crowded and commutes of more than 2 hours are more frequent than you might think. How often has someone sat next to him?

It’s such a rare occurrence (as in this is the second, maybe third time in 15 years) that my mind started trying to solve the puzzle.

 

 

 

 

 

 

How many more central banks will end up buying equities?

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”

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.

#SNB stake pic.twitter.com/eXat4KzRSe

— Olivier Crottaz CEFA (@crofin67) July 26, 2018

 

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.

SNB OFFERS TO BUY UNLIMITED AMOUNT OF TESLA AT 305 ( @RudyHavenstein )

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.

Comment

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.