Bank of Japan’s Record August Stock Market Pump!

As I have been saying today’s world has been a picture of oxymoron or may I say parallel universes

In the case of Japan. FALLING statistical growth equals RISING stocks

One can say that part of this pump has been due to Bank of Japan’s interventions which according to this report Japan's central bank now owns a record 1.5% of Japan’s listed market value as of August.

From the Nikkei Asia (bold mine) 

The Bank of Japan is growing into its role as a key source of support for the country's stock market, as it has stepped up purchases of exchange-traded funds to bring its equities portfolio to an estimated 7 trillion yen ($63.6 billion) or so.

The central bank bought 123.6 billion yen worth of ETFs in August, the largest monthly tally so far this year. At one point, it snapped up ETFs in six straight sessions amid weak stock prices.

The BOJ tends to make 10 billion yen to 20 billion yen worth of purchases when stock prices fall in the morning. The bank has not made any purchases so far in September because the market has been rallying.

According to BOJ data, the market value of individual stocks and ETFs that it held as of March 31 came to 6.15 trillion yen. Given its purchases since then and the market rally, the value is estimated to have increased to a whopping 7 trillion yen or so by now.

That figure accounts for 1.5% of the entire market value of all Japanese shares, or roughly 480 trillion yen. It also means the BOJ may surpass Nippon Life Insurance, the largest private-sector stock holder with some 7 trillion yen in holdings, as early as this year and emerge as the second-biggest shareholder behind the Government Pension Investment Fund -- the national pension fund with 21 trillion yen.

The BOJ started outright purchases of shareholdings from banks back in 2002 with the aim of stabilizing the country's financial system. To prevent stocks from tumbling steeply, it also began buying ETFs in 2010. The bank does not buy individual shares now, but it doubled its annual ETF purchases to 1 trillion yen when it introduced unprecedented levels of monetary easing in April 2013.

So the "1% rule" noted by traders as BoJ buying guide has been in effect. 

Of course 1.5% of Japan's total market value can be seen by the apologists as relatively small. But the point here is the BoJ has NO business in intervening in the markets!

As I recently wrote: 

The opportunity cost of central bank intervention to boost the stock market has been the economy.

Now you know why textbook stockmarket investing has been wrong. Better have a contact on the trust department of your respective central bank.

Resources spent by the BoJ to support the stock markets should have been resources used to promote real economic growth. What the BoJ has done instead has been to artificially boost the markets via boom-bust cycles. 

And rising stocks as the statistical GDP shows have been based on rickety financial and economic foundations. Or simply said instead of stabilizing the financial system, the BoJ only has increased systemic fragility.

Think of it what happens to the BoJ’s balance sheets if the stock market crashes. 

Moreover by intervening in the markets, price discovery based on real fundamentals have been substituted for merely chasing the markets. The temporary absence of risks from government subsidies has engendered a one-way trade mentality. It's also a sign of misallocation of resources.

Therefore the contortion of stock market prices increases risks of financial instability rather than stabilizing them.

Yet central bank around the world have been intervening at a furious record pace, I recently noted that The Global Public Investor (GPI) 2014 publication, for the first time, takes a broad look at some $29.1 trillion in investments held by hundreds of public-sector institutions in more than 160 countries. Among those entities are 157 central banks, 156 government pension funds, and almost 90 sovereign-wealth funds.

It’s a sign where stock markets have been used as communications instrument to convey political goals. 

Booming stocks attempts to exhibit that government policies have been working. Alternatively, booming stocks masks the flaws of their actions. Finally, booming stocks buys government time from conducting genuine economic reforms.

Some worry about pump and dump on the micro level, should we instead fret over a systematic pump that may soon lead to a massive dump?