Tag Archives: BOJ

Bank of Japan’s rush into stocks raises fears of market distortions

Reuters, Aug 23, 2016

JAPAN - MARCH 14: A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan. (Photo by Torin Boyd/Bloomberg via Getty Images)

The Bank of Japan’s near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy.

The BOJ’s buying spree will make it harder for investors to sift good companies from bad, and raises a host of other problems including misallocating capital, making equities trading more speculative and reducing incentives for companies to meet shareholder needs, analysts say.

More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB) market and distorting interest rates.

“The increased BOJ purchasing provides a very favorable demand environment for listed equities,” said Michael Kretschmer, chief investment officer at Pelargos Capital in the Hague. “Nevertheless, in the long run we strongly doubt these type of monetary gimmicks aimed at price setting of risk assets can have a sustained positive impact on economic growth.”

The BOJ doesn’t dominate the stock market as it does JGBs, but its revved up buying of index-based shares has shifted attention to the central bank’s behavior and away from how companies perform.

That’s contributed to outsized gains for stocks such as Fast Retailing Co (9983.T), Uniqlo’s brand owner, which features prominently in the Nikkei share average .N225.

Some liken the increased purchases by the BOJ – the only central bank in the world that buys stocks at the moment – to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble.

The BOJ has sought to boost economic activity and dispel decades of deflation by flooding the system with cash through massive asset purchases. These have been mostly JGBs, but have included real-estate investment trusts, corporate bonds, commercial paper and stocks, in the form of exchange-traded funds, or ETFs.

The BOJ decided on July 29 to expand this stimulus by increasing its annual purchases of ETFs to 6 trillion yen ($60 billion) from 3.3 trillion yen.

With foreign investors largely staying away, disappointed at the lack of progress in Japan’s structural reforms, the BOJ is almost sure to be the biggest buyer on the Tokyo Stock Exchange for the foreseeable future.

“The market is driven completely by the BOJ’s buying rather than views on each companies’ earnings,” said a fund manager at a Japanese asset management firm.


Some worry the stock market could start to resemble the bond market, where the BOJ’s purchases – about 110-120 trillion yen annually – have made traders fixate on its bond buying and pay scant attention to economic data.

The BOJ’s tactics “could weaken the market’s function in the long run,” said Keita Matsumoto, head of investor sales at Citigroup Global Markets Japan. “I’m worried that could lead to a ‘JGB-ification’ of stocks.”

BOJ Governor Haruhiko Kuroda insists increased buying isn’t intended to boost share prices and wouldn’t warp the market.

The BOJ’s buying, although broad-based, benefits some shares over others.

Analysts estimate the central bank allocates about 60 percent of its buying in ETFs that track the Nikkei, 30 percent to the broader Topix .TOPX and the rest to the new JPX 400 .JPXNK400. That reflects the size of available ETFs but disproportionately benefits the 225 companies in the Nikkei over the nearly 2,000 companies listed in the Topix.

The Nikkei and Topix should roughly track each other, but the Nikkei has risen 0.7 percent while the Topix has fallen 0.3 percent since the BOJ’s announcement.

Moreover, the Nikkei is a simple average, not weighted by market capitalization, as the Topix is. That means a handful of high-priced shares that have outsized weightings in the Nikkei benefit the most.

Fast Retailing, which accounts for more than 8 percent of the Nikkei, has risen 12.4 percent since the BOJ’s decision. Softbank Group Corp (9984.T), another heavyweight, has jumped 21.0 percent, even as the tech and investment firm’s profit outlook has hardly changed.

“The rise in share prices may seem desirable but it causes harm as well,” said Shingo Ide, chief equity strategist at NLI Research Institute. “Even if companies need to improve their management, shareholders may not take them seriously if share prices are not falling.”


A BOJ ‘Mega Surprise’ Could Come Even Without Boosting Stimulus

Bloomberg, Jul 26, 2016

JAPAN - MARCH 14:  A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan.  (Photo by Torin Boyd/Bloomberg via Getty Images)

Tapping on existing stimulus pedals may not be enough for yen.

In the roulette game of Bank of Japan policy forecasting, most players are betting on Governor Haruhiko Kuroda to double down on some or all of his current three main policy tools on Friday.

If he follows through on those calls, that would mark the first time that Kuroda, a former head of currency policy at the Finance Ministry, would fail to surprise market participants. He unleashed a much bigger framework than anticipated in April 2013, unexpectedly expanded it in October 2014 and dumbfounded observers in January 2016 by unveiling a negative interest rate tactic that he had previously dismissed.

Given the premium that the BOJ chief has placed on affecting expectations in his battle to eradicate Japan’s “deflationary mindset,” some are warning that just doing more of the same when that’s what most anticipate won’t be enough to address waning inflation trends.

“With expectations inflated by reports of the Abe-Bernanke and Kuroda-Bernanke meetings, even a consensus outcome could prove disappointing for yen bears,” said Elsa Lignos, a senior currency strategist Royal Bank of Canada’s RBC Capital Markets unit in New York. Former Federal Reserve Chairman Ben S. Bernanke, a longtime advocate of Japan stimulus, met with Kuroda and Prime Minister Shinzo Abe earlier this month.

One policy tool that may be overlooked is forward guidance. A commitment never to shrink the BOJ’s massive balance sheet, even when the inflation target is reached — or a pledge to keep it at least at some gargantuan size — is one thing absent from the current public debate.

“If the BOJ said that this week, it would be a mega surprise for me and other Japanese market participants,” Izuru Kato, head of Totan Research Co. in Tokyo, said of a balance-sheet pledge.

Kato himself sees the BOJ taking some new policy steps on Friday, given increasing sustainability concerns with the three main tools — government bond purchases, the negative rate on a portion of commercial bank reserves and the buying of risk assets including exchange-traded funds. He sees some other unanticipated action, such as a broad expansion in collateral for BOJ loans.

The catch for Kato on a balance-sheet commitment is that Kuroda’s Finance Ministry heritage would make it unlikely for him to essentially give the government a pass on fiscal consolidation.

Yet it’s known that BOJ officials have in the past debated a strategy of maintaining a large balance sheet — at least back in 2014, according to people familiar with the talks at the time. The context then was to avoid any spike in bond yields when the central bank reached its inflation target.

Such a commitment could also offer a crucial counterweight to any other surprise the market would take negatively — like paring down the elusive 2 percent inflation target or abandoning its two-year time-frame.

The roulette ball lands on Friday.


Slumping Japan exports, factory orders add to headaches for PM Abe, BOJ

Reuters, May 23, 2016

JAPAN - MARCH 14:  A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan.  (Photo by Torin Boyd/Bloomberg via Getty Images)
JAPAN – MARCH 14: A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan. (Photo by Torin Boyd/Bloomberg via Getty Images)

Japan’s exports fell sharply in April and manufacturing activity suffered the fastest contraction since Prime Minister Shinzo Abe swept to power in late 2012, providing further evidence that the premier’s Abenomics stimulus policy is struggling for traction.

The bleak readings on the health of the world’s third-largest economy follow Japan’s failure last week to win support from its global counterparts to weaken the strong yen, which Tokyo fears could do further damage to the sputtering economy.

They also add pressure on both Abe and the Bank of Japan to do more to rev up flagging growth, even as economists and global investors worry that central banks may be reaching their limits with radical experiments that have yet to kick-start growth.

Data on Monday showed Japan’s exports fell 10.1 percent in April from a year earlier, the fastest decline in three months as a stronger yen and weakness in China and other emerging markets take their toll on the country’s shipments.

Imports shrank more than 23 percent, reflecting not only lower commodity prices but stubbornly weak domestic demand that has defied a massive asset-buying program by the BOJ which is now into its fourth year.

The decline was likely exaggerated by a drop in U.S.-bound car exports due to supply-chain disruptions caused by earthquakes in Japan last month, but a firmer yen and lackluster global demand are clouding the outlook for 2016. Some analysts fear the economy could contract this quarter after dodging a return to recession early in the year.

“Drops in U.S.-bound car exports were noise,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Asia and the global economy remain weak. On top of that, yen gains squeeze profits at exporters, causing wages and capital spending to weaken, which would hamper ‘Abenomics’ aim of creating virtuous growth,” Minami said.


Japanese officials recently threatened to intervene in foreign exchange markets to halt “disorderly, one-sided” moves as the yen bolted to 18-month highs, but the United States issued a fresh warning to Tokyo on Saturday against weakening its currency, overshadowing a Group of 7 finance leaders’ gathering to discuss how to revive growth.

Bank of Japan Deputy Governor Hiroshi Nakaso, while declining to comment on how a strong yen could affect its policy decisions, said on Monday it was desirable for currency rates to move stably, reflecting economic fundamentals.

“The desirability of exchange-rate stability is widely shared by the Japanese industry,” he said at a seminar.

The BOJ is widely expected to expand policy again by July, after shocking global markets by moving to negative interest rates earlier this year. Such a move, along with a possible interest rate hike by the U.S. Federal Reserve, could take some fire out of the yen.

Abe is widely expected to unveil an additional budget this summer, and many analysts expect he will postpone a sales tax increase slated for early next year, though officials have publicly said they will press ahead with the plan barring a massive shock to the economy.

A private business survey on Monday suggested more pain ahead for Japanese manufacturers. The Markit/Nikkei preliminary survey for May showed factory activity shrank for the third straight month while total new orders declined at the sharpest pace in 41 months.

Exports to China – Japan’s largest trading partner – fell 7.6 percent in April, while the U.S.-bound shipments fell 11.8 percent year-on-year. Car exports to the United States fell 4.4 percent, down for the first time since November 2014.

Exports to Asia, which accounts for more than half of Japan’s shipments, fell 11.1 percent in the year to April, but EU-bound shipments rose 9.9 percent.

Toyota Motor Corp (7203.T) recently forecast a bigger-than-expected 35 percent tumble in net profit for the current year due to the sharp appreciation of the yen, ending three straight years of record profits driven in part by a weak currency. But it still expected global sales to inch up this year.

The yen was trading around 110 to the dollar JPY= on Monday, pulling back from a high above 105 yen earlier this month, its strongest since late 2014.


Bank of Japan quietly buying up huge stakes in nation’s blue-chip companies

The Straits Times, Apr 25, 2016

Businessmen walk past the Bank of Japan (BOJ) building in Tokyo.

They may not realize it yet, but Japan Inc.'s executives are increasingly working for a shareholder unlike any other: the nation's money-printing central bank.

While the Bank of Japan's name is nowhere to be found in regulatory filings on major stock investors, the monetary authority's exchange-traded fund purchases have made it a top 10 shareholder in about 90 per cent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data.

It's now a major owner of more Japanese blue-chips than both BlackRock, the world's largest money manager, and Vanguard Group, which oversees more than US$3 trillion (S$4.06 trillion).

To critics already wary of the central bank's outsized impact on the Japanese bond market, the BOJ's growing influence in stocks risks distorting valuations and undermining efforts to improve corporate governance.

Proponents, meanwhile, say the purchases provide a much-needed boost to investor confidence. With the Nikkei 225 down 8.3 per cent this year and inflation well below official targets, a majority of analysts surveyed by Bloomberg predict the BOJ will boost its ETF buying - a move that could come as soon as Thursday.

"For those who want shares to go up at any cost, it's absolutely fantastic that the BOJ is buying so much," said Shingo Ide, chief equity strategist at NLI Research Institute in Tokyo. "But this is clearly distorting the sanity of the stock market."

Under the BOJ's current stimulus plan, the central bank buys about 3 trillion yen (S$36.53 billion) of ETFs every year. While policy makers don't disclose how those holdings translate into stakes of individual companies, estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg's findings.

The estimates reveal a presence in Japan's top firms that's rivaled by few others, with the BOJ ranking as a top 10 holder in more than 200 of the Nikkei gauge's 225 companies. The central bank effectively controls about 9 per cent of Fast Retailing Co, the operator of Uniqlo stores, and nearly 5 per cent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp, one of the world's largest makers of musical instruments, and Daiwa House Industry Co, Japan's biggest homebuilder.

If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen - the pace predicted by Goldman Sachs - the central bank could become the No 1 shareholder in about 40 of the Nikkei 225's companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings' estimate of 13 trillion yen.

While the BOJ's ETF buying has come under fire from opposition lawmakers, Governor Haruhiko Kuroda has repeatedly defended the programme, saying as recently as last week the purchases aren't big relative to the size of Japan's stock market.

At an estimated 8.6 trillion yen as of March, the BOJ's holdings amount to about 1.6 per cent of the total capitalization of all companies listed in Japan. That compares with about 5 per cent held by the nation's Government Pension Investment Fund. The central bank's use of large-cap ETFs means its positions are concentrated, with less impact on the thousands of Japanese companies outside benchmark indexes.

State intervention in stock markets has worked out well for some countries. The US government spent US$245 billion to prop up banks during the global financial crisis in 2008, earning a profit of about US$30 billion on their investments as the industry recovered. At the height of the Asian Financial Crisis in August 1998, Hong Kong bought HK$118 billion (S$20.59 billion) of local shares to defend its currency peg, helping to fuel a rally that allowed it to dispose of the entire stake within five years.

In Japan, there's little sign that BOJ share purchases have inflated Japanese valuations to dangerous levels. The Nikkei 225 trades at 16 times estimated earnings for the next 12 months, in line with the MSCI World Index. Over the past five years, the Japanese gauge has fetched an average premium of 14 percent.

Still, the longer the BOJ's buying persists, the bigger the risk that market prices will detach from fundamentals. Assuming Goldman Sachs's prediction for more stimulus proves correct, the BOJ could end up owning a quarter of Mitsumi Electric Co, a supplier to Apple Inc, and 21 per cent of Fast Retailing by the end of 2017, estimates compiled by Bloomberg show.

With such large stakes sitting in index-tracking ETFs that lack a mandate to scrutinize company performance, the BOJ's intervention could also hamper attempts to improve Japan's corporate governance, according to Nicholas Benes, representative director of the Board Director Training Institute of Japan.

"The reality of index ETFs is that their commissions are very low and they cannot spend much on engagement or analysis for proxy voting," Benes said.

The central bank said in December that it plans to buy additional ETFs that weigh holdings based on metrics that include research spending and employee wage growth, but the BOJ hasn't started those purchases yet because the funds don't exist.

While bulls have cheered the BOJ's efforts to lift share prices, the central bank is bound to reverse its intervention at some point, a potential source of instability that Sumitomo Mitsui Trust Bank Ltd says is increasingly on the minds of long-term investors.

"Of course, you can argue that we're in abnormal times so we have abnormal measures," said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui. "The biggest question in the future will be: What happens when the BOJ exits?"


John Rubino: Startling Inflation News Illustrates The Failure Of Easy Money

By John Rubino, Apr 13, 2016

Startling Inflation News Illustrates The Failure Of Easy Money

After three decades of epic deficit spending and three years of extraordinary money creation, Japan’s economy is enjoying a rollicking inflationary boom. Just kidding. Exactly the opposite is happening:

Japan households’ inflation expectations hit three-year low – BOJ

(Reuters) – Japanese households’ sentiment worsened in the three months to March and their expectations of inflation fell to levels before the Bank of Japan deployed its massive asset-buying programme three years ago, a central bank survey showed.

The survey’s bleaker outlook keeps alive expectations of additional monetary stimulus even as BOJ Governor Haruhiko Kuroda maintained his optimism that the world’s third-largest economy was recovering moderately.

Kuroda, however, warned that he was closely watching how a recent surge in the yen and slumping Tokyo stock prices could affect the outlook.

“Global financial markets remain unstable as investors are becoming increasingly risk averse due to uncertainty over the outlook of emerging and resource-exporting economies,” Kuroda said in a speech at an annual meeting of trust banks on Monday.

“The BOJ won’t hesitate to take additional easing steps if needed to achieve its inflation target,” he said.

The BOJ’s quarterly survey on people’s livelihood showed the ratio of households who expect prices to rise a year from now stood at 75.7 percent in March, down from 77.6 percent in December and the lowest level since March 2013.

A separate index measuring households’ confidence about the economy stood at minus 22.5 in March, worsening from minus 17.3 in December to the lowest level since March 2015.

The gloomy outcome underscores the dilemma the BOJ faces as it battles mounting external headwinds for the economy with its dwindling policy tool-kit.

The BOJ’s adoption of a massive asset-buying programme, dubbed “quantitative and qualitative easing,” in April 2013 was intended to spur public expectations that prices will rise, and in turn, encouraging households and firms to spend.

That has failed to materialise, forcing the central bank to add negative interest rates to QQE in January in a fresh attempt to accelerate inflation towards its ambitious 2 percent target.

The move has failed to arrest a worrying spike in the yen or boost business confidence. Japan’s economy contracted in October-December last year and analysts expect it to post only feeble growth, if any, in January-March. Inflation has also ground to a halt, keeping the BOJ under pressure to ease again in coming months.

A separate poll by private think tank Japan Center for Economic Research, among the most comprehensive surveys conducted on Japanese analysts, showed 39 of the 44 analysts surveyed projecting that the next BOJ move would be further monetary easing.

But Japan is a unique case; easy money is generating excellent growth and rising inflation pretty much everywhere else. Just kidding again. The US, after multiple QEs and a doubling of federal debt, is looking a lot like Japan:

Consumers’ Inflation Expectations Fell Again in March, Fed Says

U.S. consumers’ expectations for inflation declined in March following a rise from record lows the month before, according to Federal Reserve Bank of New York data released Monday.

The numbers, which have been highlighted recently as a potential cause for concern by top officials including Fed Chair Janet Yellen and New York Fed President William Dudley, may add to the debate over downside risks to the U.S. central bank’s 2 percent inflation target. These risks have contributed to policy makers’ cautious approach to tightening monetary policy this year following a decision in December to raise interest rates for the first time in almost a decade.

The median respondent to the New York Fed’s March Survey of Consumer Expectations expected inflation to be 2.5 percent three years from now, down from 2.6 percent in the February survey. In January, expected inflation three years ahead was 2.45 percent, marking the lowest level in data going back to June 2013.

Inflation expectations April 16
The New York Fed divides survey respondents into two groups based on a short aptitude test: high-numeracy and low-numeracy. Expected inflation among high-numeracy respondents, which tends to be more stable than that for low-numeracy respondents, declined to a record low in March.

The drop came despite a rise in expected gasoline prices. The median survey respondent in March expected the cost of gas to be 7.3 percent higher a year.

This is odd, since oil prices have stabilized and a consensus seems to be forming around the idea that inflation is about to pick up. Some talking heads are even wondering how the Fed will respond to the above-target inflation that’s coming. See Just how much of an overshoot on inflation will the Fed tolerate?

So what’s with all the pessimistic consumers?

Well, a data series from PriceStats (related to MIT’s Billion Prices project, I think) that measures a wide variety of prices in real time has the answer: Prices are actually falling faster than the official CPI number indicates, and have not picked up as oil has stabilized. In fact, the US has been in deflation for the past five months.

PriceStats inflation April 16

So it’s no surprise that people who are actually buying the stuff that’s falling in price would register this fact and answer surveys with deflationary sentiments. It’s also no surprise that central banks, which presumably see the same data, would be looking for ways to ease even further (Japan and Europe) or walk back their previous threats to tighten (the US Fed) — apparently in the hope that increasing the dose will cure the credit addiction.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit: