Bank of Japan Hearts the Stock Market

From the Marketwatch.com

The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date, though the move failed to prevent a sharp fall for the Tokyo equity market.

The Japanese central bank said it spent 39.7 billion yen (about $500 million) buying up stock ETFs as part of its ongoing asset-purchase program, breaking a previous record of ¥28.5 billion, set on April 16.

In addition to the ETF buys, the Bank of Japan also acquired ¥2.3 billion in real-estate investment trusts Monday.

Since the 2008 collapse of Lehman Brothers and ensuing global crisis, central banks around the world have embarked on a spree of asset-buying meant to avoid deflation and, to a certain extent, support the markets.

But Japan’s monetary authority is almost unique among its peers in the major developed economies in its high-profile purchases of ETFs, which it began in December 2010 as part of aggressive easing measures.

Since then, the Bank of Japan has bought almost ¥1 trillion worth of ETFs — along with another ¥78.9 billion in REITs — and has an additional ¥642 billion to spend on the stock funds after raising the program’s size at it last policy meeting in April.

The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

The Bank of Japan (BoJ) has shown that they have been true and blue disciples of US Federal Reserve chair Ben Bernanke, who once preached that

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Yet the real reason why the BoJ has been transferring resources from their economy to stock market investors, via the Bernanke doctrine, have been to provide support to the banking system which has substantial exposure on the equity markets through the interlocking shareholdings relationship.

As this paper from the faculty of Hirosaki University explains,

In Japan, interlocking shareholdings among firms have its own peculiar character, and they have contributed to accumulating the enormous amount of hidden profits in firms by adapting the accounting system based on cost and realization basis. A feature of interlocking shareholdings is that firms hold each other’s shares as stable shareholders. Stockholding relations between banks and its client firms are present in any main bank relationship. On another plane, the large securities appraised loss arises by such system every year, and it has became one of factors that make the finance of firms and banks more unhealthy with non-performing loans. On the other hand, there will be few merits in contributing to enhancement of competitiveness and economic development, while the relationship between firms and banks gives the incentive, which commit long-term investments to the management of firms through interlocking shareholdings.

Of course, not only did interlocking shareholdings play an important part in the implementation of stable shareholding arrangements and maintaining of trade relation but also became institutional measures to avoid the threat of international capital markets, i.e. take-over bid (TOB), mergers and acquisitions (M&A) etc.

In any case, the mechanism of interlocking shareholdings delicately influences the relationship between banks and firms.

See how the BoJ promotes the interests of their politically favored institutions or cronies?