How the Bank of Japan Pushed Japanese Stocks to Milestone Highs

I have previously noted that the Bank of Japan has included stock markets as part of the assets on their QE program

Yet the brazenness of the distortions from the BOJ's stock market interventions has even prompted the mainstream to see and report them.

From the Wall Street Journal: (bold mine)

The Bank of Japan’s aggressive purchasing of stock funds has helped Japanese shares climb to multiyear highs in recent months. But some within the central bank are growing uncomfortable about the fast-paced rally and the bank’s own role in fueling it.

Since Gov. Haruhiko Kuroda took office in March 2013 and introduced monetary easing of what he called a “different dimension,” the central bank has sharply increased its buying of baskets of stocks known as exchange-traded funds. By directly underpinning the market, officials have tried to encourage private investors to follow suit and put more money in stocks in the hope of stimulating the economy and increasing inflation.

During the past two years, the central bank entered the stock market roughly once every three days, picking up a total of ¥2.8 trillion ($23 billion) of ETFs that track Japan’s major stock indexes, according to Bank of Japan records. That distinguishes it from the U.S. Federal Reserve and European Central Bank, both of which have bought bonds to pump up the economy but haven’t directly bought stocks.

Analysts say the bank’s action has been a significant driver of Japan’s stock-market rally in recent months, combined with hefty purchases by the $1.1 trillion Government Pension Investment Fund. Their buying has often countered selling pressure from individuals in the market and made up for a weaker appetite among foreign investors.

I wrote this last November 2014

This is how the Japanese government has perverted Japan’s stock market. The public now will buy stocks in the hope that the BoJ and the GPIF will buy from them at higher rather than base one’s allocation from the cap rate of stock market and property investments. The public has been buying stocks out of moral hazard, someone (Japan’s taxpayers) will pay the price for the recklessness of a few.

Apparently those from within the central bank whom has been “growing uncomfortable”, realize how this absurd dynamic has been in place.

And the above confirms my presentation that it hasn’t been the households whom has been benefiting from milestone highs but foreigners and a few privileged domestic financial institutions.

Here is an update of foreign speculators dominating the record ramp of Japanese stocks which Tradingeconomics.com reports that “Stock investment by foreigners in Japan increased by 290 JPY Billion in the week ended March 7th, 2015.”

In short, current policies have yet "to encourage private investors" to jump into stocks.

 

The BoJ as index manager:

The central bank has stepped in mostly when market sentiment was weak. Three-quarters of the central bank’s buying occurred on days when the benchmark Topix index opened lower, according to a Wall Street Journal analysis of BOJ data.

The index has gained more than 50% since the start of Mr. Kuroda’s policy…

The stock buying, which began on a small scale under Mr. Kuroda’s predecessor in 2010, has intensified since Oct. 31 last year, when the central bank expanded its annual asset-purchase program by up to 33%. The annual goal for its purchases of ETFs was tripled to ¥3 trillion.

Because the Bank of Japan is unlikely to reach its goal of boosting the annual rate of inflation to 2% anytime soon, doing away with the deflation that has intermittently plagued Japan, speculation about possible further intervention is growing.

The book value of the bank’s ETF holdings stood at ¥4.323 trillion as of the end of February, according to Bank of Japan data, and the market value is likely higher because of recent rises. The bank estimates the book value will reach about ¥6.8 trillion by the end of this year.

For comparison, Nippon Life Insurance Co. is the single biggest private institutional investor in Japanese shares, with ¥8.2 trillion in Japanese stock assets as of last December. Stocks listed on the first section of the Tokyo Stock Exchange have a total market value of about ¥550 trillion.

Political barriers to the stock market intervention intensifies…

BOJ officials are divided over the wisdom of its growing activity in financial markets. Four of the nine board members opposed the October decision, citing, among other reasons, the fear of undermining market functions.

While the dissenters’ main concern was the bond market, Takahide Kiuchi, one of the dissenters, expressed concerns over surging stock prices at a news conference on March 5. “I don’t think there have been any dramatic changes in fundamentals,” he said.

Some within the BOJ think it may need to consider reducing its ETF purchases if the stock market keeps rising, according to a person familiar with the matter.

Those in the mainstream group within the bank, officials who supported the aggressive easing measures last October, have interpreted the bull market as evidence that their efforts to eliminate a “deflationary mindset” in Japan are bearing fruit. They shrug off the suggestion that the bank itself could cause overheating of the Tokyo stock market, people close to the BOJ said.

Some economists criticize the central bank’s stock purchases as another form of “price-keeping operations,” referring to a largely unsuccessful attempt by Tokyo in the 1990s to support a falling stock market by funneling savings in accounts at post offices and public insurance money into stocks.

BOJ officials used to be cautious about purchasing ETFs, worried that it could distort market activities and put the central bank’s own financial health at risk. But under pressure from politicians following the global financial crisis, the bank changed its stance in late 2010.

“We led the cows to water, but they didn’t drink it, even though we told them it tasted good,” Miyako Suda, who was a board member then, wrote in a 2014 book discussing monetary easing at that time. “So we thought we should drink it ourselves, showing them it was tasty.”

Doing the same things over and over again and expecting different results.

This simply shows how stock markets have become politicized and been used as instruments for political agenda thus impairing its price discovery and discounting mechanism. As I previously pointed out, this has not just been a Japan dynamic, as of early 2014 global government intervention in stocks has reached $29 trillion since 2009.

As history shows, such booms will be fleeting.