The two biggest buyers of Japan Inc. are flying blind and don’t care.
The Bank of Japan and the Government Pension Investment Fund (GPIF) have been buying stocks to inflate the market, create some kind of “wealth effect,” and bamboozle regular Japanese into pouring once again into stocks, after many of them lost a big chunk of their savings when the prior bubble imploded without ever recovering.
In 2014, the GPIF – buckling under the pressure from the Abe administration – decided to plow about 25% (“±9%”) of its assets into Japanese stocks. With assets at the time of still about $1.4 trillion, 25% would amount to about $350 billion. So the fund has been buying a lot! And it has been a disaster! [Read… Japan Mega-Pension Fund Dives into Stocks, Foreign Assets, Loses Shirt. People Not Amused]
But even after Japanese stocks took a licking over the past year, the fund’s allocation to domestic equities is still 21%, so near its range and no longer a powerful buyer. But to make up for any holes left behind by the pension fund, the BOJ announced on July 28 that it would nearly double its annual purchases of equity ETFs to ¥6 trillion ($59 billion).
The holdings of Japanese stocks by these two entities have nearly tripled over the past five fiscal years to about ¥39 trillion ($381 billion), according to The Nikkei. During that time, the Nikkei stock index soared 70%, “demonstrating their powerful support.”
But, but, but… the index remains 57% below its bubble peak of 1989.
So what has this done to overall government ownership of Japanese stocks? We don’t really know, because it’s kept purposefully opaque, according to The Nikkei:
These major public-sector buyers do not appear on shareholder lists because of their indirect ownership via trust banks and other intermediaries.
And yet, The Nikkei figured that “the two together are the largest shareholders for 474 of about 1,970 stocks” on the Tokyo Stock Exchange’s first section (the section for large companies), “based on public information.”
And this is just the beginning.
So for example, between the GPIF and the BOJ, they own 17% of TDK, 16.5% of Advantest, 14.2% of Nitto Denko, 14.2% of Yokogawa Electric, more than 10% of entertainment company Konami Holdings and security services provider Secom.
“We hope they will hold the shares over the long term,” fretted an official of Yokogawa Electric. Because if they ever tried to sell those shares, all heck would break loose.
Overall, the BOJ and the GPIF now hold over 7% of stocks in the first section of the TSE. By contrast the largest private-sector stockholder, Nippon Life Insurance, holds only about 2% of the stocks in the first section.
So hopes are high that the BOJ’s buying binge of ¥6 trillion in equity ETFs, and whatever the GPIF might still buy – though it’s largely finished as a buyer – will inflate the market. Nomura Securities chief strategist Hisao Matsuura thinks that the ¥6 trillion a year from the BOJ alone will inflate the Nikkei index by 2,000 points per year, or about 12%… year after year… come hell or high water, one would assume, because according to this logic, nothing else but central-bank and government-pension-fund buying matters.
If companies have declining sales, losses, and nightmarish management, it wouldn’t matter. These companies would still be able to raise funds and go on as if nothing happened because there will be a relentless and dumb bid, and their stocks would soar since the BOJ and GPIF are passive shareholders, blindly buying equities mostly in form of ETFs. Owners of ETFs cannot dump individual stocks; they cannot punish companies by selling their shares – the most fundamental action of the market.
In other words, the largest most relentless buyers and owners of Japan Inc. are blind, dumb, and mute. That might suit Japan Inc. just fine. Entrenched management coddled by these big passive investors has nothing to worry about. Forget the discipline of the market, or price discovery, or pressures on corporate governance, or any other function of the market. They will all disappear – if they haven’t already.
In this scenario, companies can turn into zombies while the BOJ and the GPIF will still be loading up on ETFs that contain these shares and keep their prices high. And keeping prices artificially high is the only goal of all this buying.
Neither the BOJ nor the GPIF could ever unload these ETFs without unwinding the stock price inflation their relentless and blind buying has caused. And in turn, if the BOJ and the GPIF start selling their ETFs, even high-performing companies would see their share prices get eviscerated.
With these two public elephants in the room, nothing else matters. And this has some ironic consequences, according to Shingo Ide, chief equity strategist at NLI Research Institute: “Regular investors who focus on company analyses may hesitate to buy.” And that may have something to do with the swoon of Japanese stocks over the past 12 months.
But the BOJ is already fretting about the next crash and is building up a big pile of dry powder. Read… Bank of Japan Prepares for Crash Triggered by Fed Tightening
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Hmm, this approach needn’t be all bad, after all there is a reason they are doing this. IF the Japanese public shareholder doesn’t take a role in corporate governance (just votes with majority after the other shareholders have voted) and IF it similarly supports smaller firms and especially start ups, this could be just a benign form of fostering inflation. And no need to sell the shares either; just strike them from the books and replace the cb with fresh fiat when they want out.
But that’s not how it looks; they are supporting only the biggest firms, giving them unfair advantages over smaller, more innovative players. Add to that any large organization’s emergent behavioral trait of repressing competition, together with their new intimate government contact, and the scene is set for a Roman like declined into inefficiency, graft and festering malaise.
Or perhaps this will work after all. Contrary to the overwhelming current public opinion, government can do things right and sometimes even more efficiently than the private sector. The military (pre contractor days), space program, science or even just infrastructure are shining examples of things done right. In any case i wish the Japanese luck! I’ll be traveling Asia next spring and will start in Tokyo, so I’ll see first hand how they’re doing.
Yeah right… government so efficient that the US military can’t account for ten trillion dollars. and they are just the tip of the iceberg of incompetence corruption and festering cronyism that plagues every w1estern government without exception and every tin pot African and Asian and third world toilet in equal measure.
Hahaha Trust the government.. Good luck on that.
it will be similar to the results of ECB policy in Europe: while big multinationals get paid for issuing more debt by the ECB, keeping them in an artificial bubble where performance no longer matters, small companies cannot get any loans or only at crushing rates like 8-10% because banks couldn’t care less – lending out just a few 100K, how could they ever make money from that? So small businesses get crushed and big businesses get pampered with all the money the ECB steals from savers.
As to the military, space program or science being shining examples of things done right … I think you must have the latest model of extra- rose-colored glasses. I know plenty of examples of extreme waste, stupidity and contra-productive activity in all those sectors, thanks first of all to government interference. The military and certain sectors of Big Science (like healthcare and everything even vaguely related to the military) are TBTF just like the banks, and they know it.
:) I do seem to wear a pair of extra rose-colored glasses sometimes .. But there’s also a black pair, maudlin even. Gives great contrast with the right historical / life experience background.
Btw by science I mean public endeavors like university research, the EPA (underfunded and sabotaged as it is) etc. In fact many US institutions are still world-class. But no arguments from me that healthcare in the US isn’t a disaster of epic proportions. But that’s more due to skewed financial incentives / closed markets within the system and monopolies exploiting the helpless. Some good ole’ fashioned ‘socialist’ regulation with teeth could fix this in less than a decade.
Back to the rose-colored glasses to give you a parable: Have you ever considered why most African Americans are obese? It’s cultural: After farming got mechanized, their chronic malnutrition ended. After 200 years of valuing food above all else, it’s no wonder black parents in the 50s thought overfeeding their children was wise. Being fat was a status symbol with (as we know now) terrible health consequences. But there’s always hope on the horizon: Cultures change in predictable ways, usually oscillating between opposing poles. For example, the Germans were described as extremely clannish, lazy, unorganized and overly emotional just 200 years ago.
There’s a theory in history I subscribe to, namely that it takes 5 generations for a major cultural trauma to be digested, or simply for deep change to occur. The Japanese just had 30 years of a kind of depression after the manic rebuilding after WW2. My spidey sense says they are getting over it, pulling together and thinking of the future.
I’m therefore (for many reasons) rather bullish on Japan. They are a strong country and rightfully deserve their safe-haven status. Public shareholders aren’t ideal, but it can work. And yes, inflation done right can be very healthy for an economy, almost as good as tariffs and China-style industry support.
Well for you ‘western folks’ that have never lived in Japan there is no such thing as ‘public’ or small shareholder corporate governance.
They really are just one ‘big happy family’ there- the big bank shareholders, the big insurance company shareholders, the interlocking company shareholders, and even the company run unions.
Companies in Japan REALLY are run differently than in the USA or Australia.
Do your DD and look at companies other than on the TSE first section. Some very interesting companies there
You sound excited about Japanese stocks. But remember: if your currency is something other than the yen, you have two bets: 1. on stocks, and 2. on the yen.
Notice how Japanese stocks soar when the yen declines, like today? Abenomics is trying to crush the yen as a matter of policy, hoping to give Japan Inc some advantage. This might help Japanese stocks, but it will go against your bet.
For example, if stocks go up 15% and the yen falls 10% against your currency, you only made 3.5% theoretically. Then subtract all the fees and commissions involved in something like this, and you’re in the hole.
Looking at the outcome backwards
we see what in fact is occurring is the Japanese Government now has significant control over each of these individual companies.
do not tow the government line and we sell your shares and destroy you
do what we say we buy more shares.
Yes, a very interesting thought!!!
When I went to school the nationalization of private companies – you know, like, what the Nazis did in Germany – was called Socialism.
“what in fact is occurring is the Japanese Government now has significant control over each of these individual companies”
I wonder if they’ll ever fit within Mussolini’s version of fascism?:
“government representation through a corporatist system of “National Councils” of experts, selected from professionals and tradespeople, elected to represent and hold legislative power over their respective areas, including labour, industry, transportation, public health, communications, etc.”
Yes, Wolf, see my post on another article where I stated that exact problem for those people that are not yen based.
IMO people get all excited about markets moving one way or another and seem to forget that in any market there are always prices moving up and prices moving down.
All you have to do is find the ones that are moving up!!!
And yes, foreign currency rates can kill you if you are not hedged or have some other way of protecting yourself or make the gains even bigger (or smaller) if not.
I recall that that yen move from over the 260 yen per dollar area to under 80 yen per dollar from the time I first went to Japan until the time I left.
Did wonders for US$ income of many people (And not much of a difference for those inside the country). It made all those foreign trips, foreign real estate, and assets so much cheaper for people with yen savings that could be used to purchase those items.
It also wrecked the future for most foreign teachers at Japanese universities………………….
So the US and EU and what’s left of the UK are going to belong to the same money printers? Not much point in going to vote then, no point at all. Turn the TV off and put all your thoughts into purging the brain of all the lies being told and rid yourself of every last bit of propaganda you have been exposed to by family and friends and teachers. It’s the only way! It is going to be a rollercoaster ride.
As long as the markets have confidence in the Central banks,activities like this and even more extreme ones are going to happen.
Japanese businesses have always been an extension of the govt and their policies. To a certain extent Japanese business is an extension of the culture. Every company is like a war lord fiefdom with allegiance to the emperor. Their outlook is generational not quarterly and they have a discipline that doesn’t exist in the west. Overall, I wouldn’t worry about them, they will be there when we are long gone.
wolf apologies for my rant on this response. i think we make things harder they we really have to.
i just hope there is no crash or meltdown in their stock market. that would be an even larger waste of public money. why have a market? if u want to start a company just ask boj to give you money and they own the stock.
i truly fail to see the logic behind this kind of or any kind of purchases. this money doesnt end up where they expect it too. like all the corporations who are not investing in their futures with capital investment/expenditures, the governments are following suit giving money away to people who already have money makes little sense and has already proven over the past decade doesnt work. creating a larger divide between those who have investments and those who dont. if u want to create inflation and get the economics to start working again give every poor person 10 to 20k. these people will blow the money so fast buying all the stuff they dont need. they spend and all the corporation collect all their money again. the government wants to skip the middleman.
all im saying is this. the cost of living is too high. either reign in these costs for everyone and things will get better. people can spend and buy the crap. its a very simple thing. if you need 10 part time jobs to pay your monthly bills, it wont matter how much liquidity you pump into the market, the top 1% cannot consume like the bottom 1%.
to have a consumer driven economy, you need consumers. no consumer no corporate pro
Wow. There is nothing Japan won’t do to give its export industries an edge, and yet the country is still teetering on collapse. You have to give Detroit credit. Even after spending hundreds of billions to keep the Yen down, protecting their home markets, and now buying stocks to keep prices high, the Japanese are slowly running out of options. Pretty soon the financial markets that they have been relying on to fund their exports will dry up. Things are going to start getting interesting in Tokyo.
As long as you use paper as “money” and electronic digits as “money” you will never run out of options.
Looks that the ruling class gets to print money and basically exchange it for valuable private assets, without having lifted a finger in terms of creating value themselves. It is a defacto nationalization, versus the privatizations that have created wealth around the world. As the government takes over more and more of private business, it will start to dictate the terms of private business and get involved directly in its management. The whole country will become as efficient as the DMV, Amtrak and managed as irresponsibly as government pensions plans. Has the world gone mad?
And based on price action, it also appears they’ve been printing a little extra to bribe precious metals traders into rolling contracts forward as opposed to taking delivery?
It’s just the same as in EU and US: the elites are printing money and handing it to themselves, so they can steal from the middle class (their savings are being depreciated, prices go up and incomes don’t keep track with inflation) and buy up everything without most people noticing.
It is the endgame and will probably go on until there is a worldwide revolution with bankers and politicians hanging from lampposts everywhere (very unlikely with the current zombie generation) or a new World War to ‘restart’ the game. Or maybe we get some unplanned glitch that will cause a reset, like the internet going dark for many months or a Weimar episode ;-(
“US military can’t account for ten trillion dollars. ”
This is probably the most we can hope for, not too bad considering it could be much worse and probably will be in the future based on the trend…
Accountability is not in the vocabulary.
In the US the ZIRP and NIRP policies of The Fed pushed US corporations to do massive share buybacks, thusly intimating they might go ‘private’ as opposed to being historically ‘public’, should policies and buybacks continue long term and they buy back all of their shares ! Then they would not need to do GAAP and non-GAAP accounting fraud anymore, as they’d be private and no longer public corporations.
Is Japan imitating the US in that their Government will ultimately be taking their corporations ‘private’ by becoming their only shareholder ? At present the Government is becoming the largest shareholder in several corporations, will they soon demand a seat on the Board of Directors ? LOL
I think this is inevitable and may be good in the long run. In the fact of entrenched interest, may as well blow the whole thing up.
The BoJ might be a ‘ big dumb passive’ investor but would that always be the case and where do you draw the line? The Swiss National Bank owns a big bloc of Apple. Apple has $200 billion in cash. What’s to stop a shrewd active Central Bank from buying the shares of cash rich companies and asset stripping them? The SNB calls up Tim Cook and says deposit Apple’s cash in our fine banks or we find a new CEO! Remember the SNB isn’t using ‘real money’ to buy Apple shares just virtual money it can create at will.
Yes, the SEC has rules but there are few rules that can withstand billions in Swiss France being tossed around.
Could this kind of public stake open up a company to the possibility of compulsory releases under FOIA? Unlikely I know.
Also as far as Japanese gov becoming major shareholders, someone must buy the top so why not shift the risk onto the public?
“”Neither the BOJ nor the GPIF could ever unload these ETFs without unwinding the stock price inflation their relentless and blind buying has caused. And in turn, if the BOJ and the GPIF start selling their ETFs, even high-performing companies would see their share prices get eviscerated.””
Whenever I hear stuff like this – I always think about the US and it’s almost zero interest rate for US companies, and the US Gov. and deficits. If the fed begins raising rates, is it not the same…? As it is company margins are pretty thin, expectations for Q earnings are beat because they are reduced at each Q call…
Not to mention the great housing bubble as I read on this blog a few postings back, lower rates create the opportunity to increase the price because the payment is the decision factor in the purchase.
Or is it just all crap…. Another post back a day or two says Free Money for all ! Except those who could really need it, use it. Those same people who – no surprise – could really use it…. Do the well-to-do NEED a new car, no, Need a new washer. No, Need anything..No, they will invest it, but not spend it. The poorer 99% would do more with $100. each to help the country that the top 1% with an extra 10 million each.
I wonder what the % of inflation in the market value our stock market is? 40% ? and the same for Japan ? 40% too? or more.?
I really don’t think the BOJ is buying stocks or the pension fund is buying stocks for any “do what I say” reasons, it’s to prevent the coming crash. Extend the inevitable…. Our near zero rate is the same, take the cost of money to zero so you can show a profit margin….. that is scary….