Intervention Redefined: Japan Gov't Holds Half of All ETFs

Japan's central bank literally has a 'majority' stake in the JPY-denominated ETF market.

Imagine if Janet Yellen and the Federal Reserve held half of all monies invested in US-based, dollar-dominated exchange-traded funds (ETFs): BlackRock, Fidelity, State Street, Vanguard, and the rest of them. You can bet that US lawmakers, especially those of the Tea Party persuasion, would be up in arms about the unprecedented levels of market intervention the government was engaged in. "Such a distortion of markets has never been seen!" you can almost hear them shout.

Well, actually, something like that is already occurring in Japan. Among ETFs offered by the likes of Daiwa, Nikko and Nomura, the largest customer is none other than the Bank of Japan (BoJ). What's more, with Japan teetering on the edge of recession, the BoJ might pump even more into stock markets real soon. To paraphrase James Bond, half the market is not enough:

Japan’s central bank already owns more than half of the nation’s market for exchange-traded stock funds, and that might just be the start. The Bank of Japan will boost stimulus on Friday, according to 16 of 36 economists in Bloomberg’s latest survey, with 12 saying it would do so by increasing its annual ETF-buying budget. With 3 trillion yen ($25 billion) a year in existing firepower, the BOJ has accumulated an ETF stash that accounted for 52 percent of the entire market at the end of September, figures from Tokyo’s stock exchange show.

Practically speaking, the BoJ can already swallow all the sovereign debt Japan prints. So, the remaining option is to buy stocks. Still, many (including myself) wonder if all this effort is all for naught. Or, if benefits can be obtained after plowing in x amount of cash:

Policy makers weighing a deeper foray into equities shows how the world’s third-biggest stock market has become one of the most important Abenomics battlegrounds. The Topix index is up 21 percent since the central bank unexpectedly tripled its ETF budget almost a year ago, and Citigroup Global Markets Japan Inc.’s Tsutomu Fujita says there’s room for them to triple it again. For Amundi Japan Ltd., expanding the program would do more harm than good.

“At a fundamental level, I don’t support the idea of central banks buying ETFs or equities,” said Masaru Hamasaki, head of the investment information department at Amundi Japan. “Unlike bonds, equities never redeem. That means they will have to be sold at some point, which creates market risk.”

In Japan we see grand experiments that portend the future of societies combating chronic deflation. They may look like extreme measures, but hey, Japan is dealing with extreme problems too.