Bank of Japan Announces ETF Expansion, Nikkei Goes on a Roller Coaster Ride!

As wonderful example of how financial markets have become so distorted from central bank interventions, just observe what occurred today in Japan's financial markets when the BoJ announced the expansion of ETF buying and of the lengthening of maturities of its bond purchases.

First, the additional measures from the BoJ from the CNBC

The Bank of Japan surprised markets Friday by announcing plans to increase purchases of exchange-traded funds (ETFs) and lengthening the maturity of bonds it purchases to encourage investment in the economy.

The BOJ said under the new program, it will purchase ETFs at an annual pace of 300 billion yen ($2.45 billion) composed of stocks issued by firms "proactively" investing in physical and human capital.

The plan will start with purchases of ETFs tracking the JPX-Nikkei Index 400, which screens for factors including corporate governance and investor-focused management.

The new ETF purchase program will begin in April and is in addition to the current ETF purchase program of around 3 trillion yen annually.

The BOJ meanwhile held rates steady and said it will stick to its plan to increase the monetary base by 80 trillion yen a year, as expected....

Meanwhile, the stated purpose for the expansion; again from the same article.

The BOJ's new ETF program is aimed in part at offsetting the possible market impact of the the central bank's sales of stock it has purchased from financial institutions since 2002, the BOJ statement said. It plans to take 10 years to sell those shares at a pace of around 300 billion yen annually.

The BOJ also said it would change the average maturity of its Japan government bond (JGB) purchases to 7-12 years next year from around 7-10 years at the end of this year.

But while the BOJ statement made an initial splash in markets, it isn't clear that it adds up to much.

"These are all helpful measures, but they won't make much difference in practice," Capital Economics' Thieliant said, noting that the 300 billion yen in additional ETF purchases is "minuscule."

My hunch is that possibly aside from the "sales of stock", which will be offset by this expansion, the BoJ may likely be responding to the Fed's rate hike

Yet how stocks and the yen reacted...(from CNBC)

After the decision, the Nikkei retraced early losses, climbing as much as 2.7 percent, before returning to negative territory. The dollar rose against the yen initially, fetching as much as 123.58 yen, compared with around 122.40 yen before the decision. The pair later retraced gains, with the dollar fetching 122.17 yen around 0437 GMT.

Stock market gamblers smelled blood and powered the Nikkei to spike by more than 2.7%, during the announcement! But after digesting the information from the updated program, whereby the expansion was construed as "minuscule", they sold off!

The Nikkei 225 traveled 2.7% up and then roundtripped or erased the gains plus closed the day down 1.9% (images above from Bloomberg). 

So that would account for a staggering 7.3% intraday move! Awesome volatility!

Such volatility has likewise affected the USD yen (chart from investing.com) as indicated by the article.

By turning participants into Pavlovian dogs dependent on central bank actions, financial markets have become totally deformed or has lost its essential 'price discovery' functions. And this is why when economic reality will reassert control (sometime soon) from central bankers, the adjustments from such massive distortions will be disorderly and violent. 

Today's actions should serve as a blueprint for things to come.