Bank of Japan Prepares for Crash Triggered by Fed Tightening

Building up a big pile of dry powder.

No central bank of a developed country equals the Bank of Japan in trying to manipulate the stock market up by buying equities. The BOJ has done this for years. With breath-taking ineffectiveness.

So on July 28, the BOJ announced another stock market pump-up scheme: it would nearly double its annual purchases of equity ETFs from about ¥3.3 trillion to ¥6 trillion ($60 billion).

Hedge funds and other speculators expected for the BOJ to instantly throw its weight around in the stock market, and hopes were riding high that the Nikkei would surge, or at least rise in a visible manner. Alas, on Friday in Tokyo, the Nikkei dropped to 16,361, down a smidgen from where it had been on July 28.

The debacle was right in line with the BOJ’s prior stock-market pump-up schemes. While it managed with its negative interest rate policy to totally kill off all money market funds in Japan, with the last 11 shuttering earlier this year, and while it managed with its gigantic purchases of Japanese Government Bonds to completely freeze up the JGB market, the BOJ has failed to accomplish much of anything in the stock market. The Nikkei stock index is down 21% from its recent peak in June last year, and is down 57% from its all-time peak in 1989.

But nearly doubling the ETF purchases should have done something. So why did the highly anticipated pump-up-scheme rally flop?

Now an answer is seeping to the surface. It seems the BOJ is worried about a stock market crash, triggered by Fed tightening, and has decided to keep its power dry to be able to put a floor under plunging stocks later this year.

According to the Nikkei Asian Review, the BOJ purchased ETFs on only three days in August through Wednesday: August 3, August 4, and August 10, totaling ¥176 billion.

But its new rate of purchases of ¥6 trillion annually would mean ¥24 billion in ETF purchases per trading day. So 18 weekdays in August through Wednesday, minus one holiday (Mountain Day) should equate to ¥408 billion – which left the BOJ’s purchases short by ¥232 billion.

This pile of moolah has been added to its “dry powder.” Every day the BOJ is not buying ETFs, its pile of dry  powder increases. The Nikkei Asian Review:

The BOJ does not make public the process by which it buys ETFs, for fear of unduly influencing the market. But an official offered a passing reference to “last October” by way of explanation for the conservative approach.

“Last October” means this: Last year, the BOJ had front-loaded much of its ETF spending during the stock-market swoon in the summer, when China was crashing, and Japan followed. Then there were just ¥500 billion, or two months’ worth of ETF purchases, left over for the final three months of the year. So in October, it bought ETFs on just one day, saving up what was left to combat any sell-offs at the end of the year.

Hedge funds watch this sort of thing closely to wring some advantage out of it. Central bank action is all that matters anymore in the markets – at least, that’s the meme:

But as 2015 drew to a close, market players nevertheless began to suspect that the bank was out of options. An extra ¥300-billion ETF purchase quota added at the BOJ’s December policy meeting was viewed merely as a tack-on measure and failed to keep share prices from entering a slide.

This year, too, speculation around US interest rate hikes makes a stock market slide near the end of the year a real possibility.

But with stocks going nowhere now, the BOJ has decided to not waste its powder at the moment, because it wouldn’t accomplish much anyway. Instead, it would keep its powder dry for when it was needed. The Nikkei:

The BOJ does not explicitly define its buying as a stock price control measure. But eschewing a regular buying schedule to tailor purchases to market movements speaks to a significant level of concern about staving off another slide.

These ETFs are a special central-bank concoction. In a new twist last December, the BOJ promised to buy ETFs based on companies that boost wages, employment, and capital spending. But those ETFs didn’t exist. They’d have to be created first so that the BOJ could buy them.

Major asset managers in Japan have been busy creating these ETFs. Daiwa Asset Management partnered with index provider MSCI to develop a special stock index for these anointed companies. Nomura Asset Management and other firms in the Nomura group also came up with an index. The first ETFs that track those indices started trading in May.

Everything was ready when the BOJ announced at the end of July that it would nearly double its purchases of these ETFs. With every day that the BOJ is not buying, its pile of dry powder is growing. It is likely that the BOJ, when it decided to ramp up its ETF purchases in July, already knew why, and it had nothing to do with inflation or any of the other pretexts of QE: it was to prepare for the moment when the Fed made its move despite expectations that it would not, and when, in response, the markets would unravel.

But it’s doubtful that this will work out. Practically nothing the BOJ has tried to accomplish in the Japanese stock market has worked out. While stocks might have reacted positively at first, they invariably ended up tanking.

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  36 comments for “Bank of Japan Prepares for Crash Triggered by Fed Tightening

  1. OutLookingIn says:

    Central banker credibility across the globe has been lost.
    They have tried every trick in the book.
    All have failed.
    Enjoy this current interlude before reality slaps you in the face, throws you under the nearest bus, then kicks you down the cellar stairs.

    • rich says:

      What Fed tightening? The Fed will ultimately follow other central banks down the NIRP rabbit hole.

      “Central banker credibility across the globe has been lost.”

      Yeah, but big banksters have grown generationally wealthier than ever. The job of the central banks is to indemnify the klepto-corporatist bond holders at all costs, and they have done that job well, to the detriment of western world’s ever growing debt serf class.

      • Ptb says:

        Yes, the Fed has backed down from raising rates all year despite all the jaw boning about raising it. Global trade slowing down and other data suggests rates may need to be reduced. But mostly, the very wealthy and the big banks are loving the trend we’ve been in for years now.

    • Dana Weintraub says:

      Well put! And true.

  2. nhz says:

    Credibility lost for a few seasoned observers of the e-con-omy, but definitely not yet with the general public. I’m sure most people over here enjoy the lowest mortgage rates ever and the highest housing prices in 400 years, also relative to incomes (400 years is as far as the record goes in my country) :-(

    I guess the general public will only loose faith when Facebook and Twitter shut down, when the pension payments stop arriving on their account or supermarkets start looking like those in Venezuela. Reality may be suspended for a bit longer …

  3. Marty says:

    Fav part of the article: “The BOJ does not make public the process by which it buys ETFs, for fear of unduly influencing the market.” Ja, ja, ja. They just want to duly influence the market.

    • Wolf Richter says:

      What they mean is that they don’t want EVERYONE to know what they’ll buy next, and when. They only want SOME people to know.

      • Chicken says:

        Precisely, the vast majority of citizens have no concept or scale of the hubris involved. Hubris is probably not a very helpful word to describe the phenomenon and the words “theft” and “criminal enterprise” tend to close minds but that’s what it is, it’s not incompetence.

  4. night-train says:

    “With breath-taking ineffectiveness.” Nice turn of a phrase and perfect for the article that followed. Looks like there is a whole lot of shaking going on, but not much movement resulting. The CBs remind me of the days when most people had one television and we were all TV repairmen. “Hit it right there and see what happens.” It appears that the CBs have ended up in the same place.

    • Chicken says:

      This is a perfect example of why CB’s are able to continue running their scam, people don’t realize the entire show is a giant scam, they still incorrectly think at worst, it’s incompetence.

  5. WTFrogg says:

    Too bad that stupidity isn’t against the law….then again we would have to

    build more jails to house all the financial “wizards”. You have to love

    Darwinism in reverse gear.

    • Chicken says:

      No, we’re closing down Federal prisons.for white collar criminals b/c white collar crimes no longer are illegal or cause for imprisonment.

  6. Chicken says:

    Assuming BOJ gets this right, it’ll be the 1st thing they’ve gotten right in quite some time.

    Given the FED’s motus operandi is blowing ever larger bubbles then popping them and using incompetence as an excuse (to allow criminal enterprise special interest groups the opportunity of front-running the manipulated ups and downs) there’s a lot of validity in BOJ’s strategy.

  7. BOJ ( or BOE, or the FED or the ECB ) – – buying stocks or bonds or ETF or mortgage bonds ( etc. ) – – this will fail in the end as common sense teaches it must.

    But they will get away with it for a while, perhaps a long while ! After all, the thievin’ bankster class has gotten away with ZIRP for nearly a decade.

    So I have a question for Wolf : Since they are getting away with it, and things are not presenting as bad they surely must be – – what is the mechanism of this ending ? The timing would be interesting, but life has taught me that the timing is almost always unknowable.

    But the mechanism, the process of the coming failure ? I am having trouble imagining just what form it will ultimately take ?

    Thank you for your ideas in advance, I am currently bereft of good ideas on this end-game.


    • Wolf Richter says:

      SnowieGeorgie, you’re not the only one. I think even the figures populating the central banks have no concept of how this will turn out. They’re just trying to keep this charade going for as long as possible. Remember, these are individuals. Their tenure at the CB is limited. Then they’ll move on. They all hope that whatever happens will happen when someone else is in charge.

      • Chicken says:

        Connecting the dots Wolf, these guys will be compensated for their hard work and important opinions by being appointed token employment at criminal enterprise institutions.

        This isn’t by accident, just as the horse never goes behind the cart.


      • polecat says:

        Well Wolf …… some people have looooong memories !

    • Chicken says:

      I’m going to take a wild guess, and of course excluding your situation which I have no idea nor should I…..

      I’m expecting for US Treasuries to rally into the deluge, and perhaps not for PMs, in fact hoping they crash with stocks(just as I hear Harry Dent predicts but independently of HD) then once the bottom does occur US Treasuries are a good short and PM’s a long for a huge move in both.

      • kares says:

        A good article;;;;;;; but what in hell is a PM? This is crazy, the use of acronyms that most people don’t know anything about.

        • Wolf Richter says:

          Precious Metal (gold, silver…)

          You’re right about our use of acronyms. Our alphabet soup can drive people nuts. I once made the inexcusable error of putting three acronyms in a title (PE Firms, LBO, and IPO?) … terrible title. A reader pointed that out, correctly.

    • Central banks can ‘own’ a large share of a market (corner) but not all of it. An instrument outside the corner will blow up (price will drop) and the multiplier effect will do the rest. The CB price will no longer be ‘the’ price and a run will occur.

      The only question: a run out of banks, out of the entire finance system or currencies … or a run out of everything?

  8. WTFrogg says:

    Wolf, I agree with you. I’m just trying to figure out how to short the deck

    chairs on the Titanic as it were. There won’t be enough chairs or lifeboats

    when SHTF. Currently I am positioned in cash and real estate…ROI is not

    that critical on my end.

    • Wolf Richter says:

      I shorted the worst high-flyers of the dotcom bubble in November 1999. They were totally insane back then. Had lost all connection to reality. It simply COULD NOT last.

      I was three months early. I’ve never lost so much money so fast.

      I was a lot younger then. Now I no longer have the courage to short something as crazy as this market.

      Once something is crazy, there is theoretically no limit to how still crazier it can get.


      • rich says:

        One can’t sanely short stocks when central banks can buy them with unlimited money created out of thin air. For instance:

        “In the second quarter of 2016, the Swiss National Bank added $7.3 billion to its US equity portfolio, and according to its just filed 13-F, is now long a record $61.8 billion in US stocks, up from $54.5 billion a month ago. In fact, rising from $41.3 billion in total US stock holdings as of December 2015, this means that the Swiss central bank increased its total US holdings by a record 50% in the first half of 2016.”

      • WTFrogg says:

        Have to agree. I have occasionally been called crazy …..but never stupid, especially when it comes to money. ;) :-)

      • dave says:

        Its all timing and here is the problem with all these big names turning bear. All trying to time the market and it may hurt them. This show can still go on for a while maybe till election. I predict trump victory if there is a crash before election. He has warned people of the impending doom not the play for a political candidate. Builds trust.

        Wolf do u think a complete reversal of fed policy will help? Higher inflation goals? Just start pushing rates up was my original thought. Contrarian. Go the opposite way to the world.

        • Wolf Richter says:

          Dave, I’m with you.

          The Fed should try to go back to normal, let the economy take a hit to blow out the cobwebs. It’ll then be better equipped to deal with the rest of the world.

          I don’t think short term rates are that important at this low level. The Fed should raise them gradually to or above the rate of inflation.

          I think long-term rates are more important, and they need to move up, and risk-taking in the markets needs to become more thoughtful. The yield curve needs to steepen. So I think the number one priority should be for the Fed to cut down its balance sheet, say, by $75 billion a month (reverse of QE 3), through asset sales and allowing maturing bonds to roll off. That would bring up long-term rates.

          Those two measures will re-introduce a measure of reality. They will cause some gyrations in the dollar, the FIRE economy (finance, insurance, real estate), and other other measures, but after a year or so it will have settled down, and we’re back to “normal.” An island of sanity in an insane world.

          But I’m DREAMING about the Fed doing this….

  9. Tinky says:

    My favorite related quote is a few years old now, but as beautiful as ever:

    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.”

    • polecat says:

      Water from a frozen Fukushima Slushy perhaps ……. no wonder the BOJ is crazed !

  10. Lee says:

    With the Yen increasing in value from around 125 yen per dollar to around 100 yen, almost any investment based on a weakening yen will have lost money.

    That is one reason for the poor performance of the big Japanese pension fund and the the fall in value of stocks – many of which make lots of profit overseas.

    IMO Japan has some of the best managed, cheapest shares right now in the world. Do you research and you’ll find them………….

    The big risk, of course, is the foreign exchange risk posed by the yen for those that are not Japan based.

    (PS: Japan also has some of the cheapest real estate in the world as well outside of the big cities.)

    • Tinky says:

      “PS: Japan also has some of the cheapest real estate in the world as well outside of the big cities.”

      Yeah, be sure to bring a Geiger counter.

      • Lee says:

        Ridiculous comment posted without any knowledge of the situation outside of the affected area and one apparently posted without any of the RE market in Japan as well.

  11. nick kelly says:

    A fundamental question: is the Fed central banker to the US,or to the world?
    It seems likely that if the Fed was driven by its own formal mandate, which is only the US economy, interest rates would be at least one percent higher than at present- or four of the dreaded .25 % hikes, the possibility of each fueling endless anxiety and commentary.
    How many younger readers of WS, some of them financial advisers. realize that the Fed has been known to tighten in bigger increments than .25 percent?
    I don’t know and I think few do, but I suspect after the extreme turbulence in China’s markets mid- 2015, a back channel was used to ask the Fed to delay any increase.
    The above piece re: Japan, an important US ally, is more of the same.

    My conclusion: I think jitters in the EU, China, Japan, Mexico and even South America ( Brazil) have overtaken the domestic mandate of the Fed.
    It would raise rates based on US data but can’t on world data.

    Since the US IS part of the world and outside deflationary pressures could feed back to the US. this does not mean the Fed is acting unwisely.
    Can we tip- toe out of this situation or is a massive correction needed to return things to stability?
    Hopefully it is the former. All the central banks have done is buy time, time which the EU for one looks to have wasted.
    Time to do what? To quote former Russia minister of Finance Kudrin, and echoed by the current head of the Russian central bank- ‘for painful fundamental reforms’
    Although this applies above all to Russia, it applies elsewhere.

    • barefoot charley says:

      Yes, the Fed is central banker to the world. You can’t easily google it (how odd!) but Ron Paul’s one-shot actual audit of the Fed revealed that it had given *10 times* the amount publicly stated to private banks, some 8 trillion dollars, and the majority of that to Wall Street’s European suckers.

      Yes we care. In this context, the Fed understands that dollar and interest values are all that pump up or down Emerging Market stocks and currencies. A strong dollar will crush them–and who are the hot investers in Emerging Markets, hmm? So the Fed’s owners will indeed struggle to balance phony US prosperity against current bubble-pumping in Emerging Markets where money can still be made. And that means . . . no interest-rate bump in September, and no Fed cred. Life goes on.

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