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 & PulpRailway & 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.

Podcast

 

In the future will all central banks buy equities?

As the weather shows a few signs of picking up in London it appears that one central banker at least has overheated listening to Glen Frey on the radio.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Yes it is our favourite “loose cannon on the decks” which is the Bank of England Chief Economist Andy Haldane. He has been quiet in recent times after his Grand Tour around the UK to take central banking to the people and get himself appointed as Governor was widely ignored. But he is back.

LONDON (Reuters) – The Bank of England is looking more urgently at options such as negative interest rates and buying riskier assets to prop up the country’s economy as it slides into a deep coronavirus slump, the BoE’s chief economist was quoted as saying.

The Telegraph newspaper said the economist, Andy Haldane, refused to rule out the possibility of taking interest rates below zero and buying lower-quality financial assets under the central bank’s bond-buying programme.

There is a lot going on there and certainly enough for him to be summoned to the Governor’s study to explain why he contradicted what the Governor had said only a few days before. Also as is his wont Andy had also contradicted himself.

“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” he said in an interview. “How could we not be?”

So we have a lower bound for interest-rates but we are thinking of cutting below it? So it is not an effective lower bound then. I can help him out with just a couple of letters as calling it an ineffective lower bound would fix it. Of course Andy has experience of numbers slip-sliding away on his watch as the estimate of equilibrium unemployment has gone from 6.5% to around 4.25% ( it has got a bit vague of late) torpedoing his output gap theories. Even worse of course it will now be going back up. Time for him to move from Glen Frey to Kylie Minogue.

I’m spinning around
Move outta my way

Then there is Andy’s hint about buying equities.

buying lower-quality financial assets

He has a problem with those who recall him pointing out he does not understand pensions so he would not be a stock picker more a tracker man. Although of course in the UK in many ways that means the same thing. For example if we look at Astra Zeneca it was worth just under £108 billion at the beginning of this month and Royal Dutch Shell some £95 billion whereas if we those bandying for the number 100 slot we are between £3 and £3.5 billion. Then the FTSE 100 is over 80% of the all-share so by now I think you will have figured that yet again such a policy would benefit big business. Andy may not have done so as his “Sledgehammer QE” of 2016 dashed into such UK stalwarts as er Apple and Maersk. An error being repeated in the current operations.

Chair Powell

Chair Powell of the US Federal Reserve was interviewed on 60 Minutes yesterday which was likely to be more like 40 minutes when you allow for adverts. What did he say? Well after a really odd section on virology we got this burst of hype.

But I would just say this. In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know. We hope that it will be shorter than that, but no one really knows.

Eyes will have turned to the hint that it might be in 2022 as that begs a lot of questions as to what the Federal Reserve might do in the meantime. What about this for instance?

I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States. ( Chair Powell)

“probably not” eh? That is leaving the door open to a change of mind. This is in spite of the fact that in central banking terms this is quite a damning critique ( as it involves an implicit criticism of other central banks).

The evidence on whether it helps is quite mixed.

Also as section which is just plain wrong.

PELLEY: So the banks would pay people to borrow money, essentially?

POWELL: Yes.

Let us now move onto what might be called the money shots.

POWELL: Well, there’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.

The track record of central bankers using the phrase “no limit” is not good as the Swiss National Bank most famously found out. But there was more and the emphasis below is mine.

POWELL: Well, to begin, the one thing we can certainly do is we can enlarge our existing lending programs. We can start new lending programs if need be. We can do that. There are things we can do in monetary policy. There are a number of dimensions where we can move to make policy even more accommodative. Through forward guidance, we can change our asset purchase strategy. There are just a lot of things that we can do.

Comment

Central bankers are like gamblers on a losing streak desperately doubling down. You do not need to take my word for it as we can take a look at a country which has been enthusiastically buying equities for a while now, which is Japan. For example the Bank of Japan bought over 100 billion Yen’s worth as recently as Friday on its way to this.

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.

As of the last update the Bank of Japan had bought some 31.4 trillion Yen of equity ETFs. How is that going?

Japan fell into a technical recession in the first quarter for the first time since 2015

That is from the Financial Times. If you think that does not do justice to an economy 2% smaller than a year ago and seeing nominal GDP declines with a large national debt, well the FT is Japanese owned these days. Meanwhile back in the real world the lost decade(s) carries on.

Why would you copy that? Yet we seem likely to do so…..

Podcast on the UK Gilt Market