Is Haruhiko Kuroda Japan’s central bank head or the nation’s premier hedge-fund manager? He’s both, when you consider the Bank of Japan’s unprecedented hoarding of stocks via exchange-traded funds.
Since Kuroda arrived at the Bank of Japan headquarters in March 2013, the institution has cornered the government bond market.
New data show the central bank held a mind-boggling $180 billion-plus worth of equity ETFs at end of September, an increase equivalent to the annual gross domestic product of Bolivia in just six months.
That buying helped drive the Nikkei Stock Average to 26-year highs, but it also leaves Japan’s monetary authority monumentally exposed. The BOJ’s stock bet, the Nikkei reports, is 2.5 times its capital. It’s on track to top the three-times-bigger mark by the end of March.
As that portfolio balloons, it’s time to start worrying about massive paper losses if equities reverse course.
Prime Minister Shinzo Abe’s five-year-old revival scheme for the economy isn’t boosting wages, which adjusted for inflation, fell 0.1% in September.
Inflation, meanwhile, is nowhere near the BOJ’s 2% target. Once that lack of progress dawns on punters, the Nikkei’s 18% rally this year could run out of road. Threats abound from Washington, too, should President Donald Trump launch the Asian trade war he’s been promising.
Kuroda could try to contain the damage, of course. He controls one of the world’s three most powerful ATM machines. The BOJ could always step up purchases, China-style, to slow losses.
But that would just leave the Kuroda Partners LP hedge fund with even greater exposure. It means an eventual exit from ultraloose monetary policies may be pushed additional years into the future.
But China had to throw the full force of its institutional structure at the Shanghai stock market in 2015, and barely succeeded. And the BOJ has another problem, one that relates to its status as a first-world monetary power.
Should the bank’s ETF portfolio fall below book value, Kuroda’s team would have to set aside reserves to cover the mismatch. Investors getting wind of that could accelerate losses.
Kuroda’s team has been gorging on equity instruments at, or close to, the very top tick. The benchmark index has set a series of record highs and is currently just above 22,500.
The whale
As Nikkei reports, paper losses would become a problem for the BOJ should the market return to the 16,000 range. That’s hardly a stretch should another global financial crisis – or a Trump trade war – hit.
A circular logic could take hold here, too, once the BOJ mulls ways to reverse the Kuroda stimulus. Might it dissuade policymakers from restoring monetary normalcy?
At the October policy meeting, at least one board member urged a review of the pros and cons of the BOJ pushing further into stocks. Initial concerns about price distortions, the nationalization of the market, will soon give way to the market losing its “whale.”
That’s the thing about Kuroda Partners LP pushing itself deeper into bonds, stocks and any asset that might in theory reflate the economy – it gets trapped.
By some measures, the BOJ is scaling back a bit on new buying. But it has redefined the concept of investment whales, both in terms of side effects and conflicts of interest between the private and public sectors. The sheer scale of Kuroda’s holdings, though, also bumps up against the difficulty in reviving consumer confidence.
Earlier this month, Kuroda said that “although there remain issues to be resolved to achieve the price stability target of 2%, the environment surrounding prices in Japan has improved steadily compared to five years ago.”
Even so, he added, “it is not easy to quickly dispel the deflationary mindset that has formed over the course of 15 years of deflation.”
Even if the BOJ manages to revive inflation – still a big “if” – it must figure out how to withdraw from stocks and bonds without crashing the economy.
It’s obvious that Kuroda Partners LP is too big to fail. If it keeps doubling down on stocks, though, its portfolio could end up being too big to save.
https://www.linkedin.com/pulse/uae-economic-financial-market-update-congratulations-james-binding/
nice speech.. anyway..trump looks at his interest as silly america to take advantages….a dangerous game and wish!!
Surely there is a misunderstanding! This gross impression you convey that the BOJ is in precarious dire circumstances. And you are sort of attacking both the integrity of the man as well as the methodology he is using without explaining how you would have done differently if you were the BOJ or its head.
What use is that? It is like a fool saying something is wrong when he does not himself have the answer. I am no supporter of the current economic management of Japan, and the nation’s continuing malaise. But at least I admire their resilience and stoic fortitude.
Of course I have to assume that the BOJ hedge fund is a well contemplated market mix – broad and diversified in spectrum and key sectors wise, and was and is being used as either a stabilisation or a stimulant tool for levelling out the erratic highs and lows of market fluctuations.
It is misleading to call it a hedge fund. Why? The BOJ is sort of the Government or the Crown. The BOJ is not a private individual. The BOJ is not a true investor. Neither is it a manipulator as in artificially creating speculation profit. It is an ‘economic manger’. It is not a share ‘trader’ as making money is not its goal, which is keeping the national economy on even keel through stormy weather. That is its mandate.
So it buys key securities when their market prices are below what would be classified as their long term stable indicative price range and conversely sell them when their market prices are higher than their long term stable indicative price range.
As the BOJ holding has no time frame i.e. there is and will be no actual realised loss (as distinct from a transitory ‘book loss’ for annual accounts reckoning) as shares will always stay in the books until it can be sold and realised at a profit.
If the worse should prevail, then all these low valued securities when marked to long term stable indicative price range, can be conveniently ‘book value disposed’ to a fully owned subsidiary and managed within that ‘vehicle’ as if it were ‘under insolvency administration. If there is enough volume of such securities they can also be ‘securitsed’ into commercial paper by way of zero or negative rated coupons, like continuing to receive rental from a run down commercial property.
I talk too much. In simple terms, all government assets are sort of a fiat or have value simply because it is or they are government assets. It is like legal tender. If you can be like the Government and therefore have the longevity to and can hang on to assets long enough, one day, no matter how long, it will come to be of some value or more. For the Government has the armour guard habiliment of not having to change and buy new clothing. That is the advantage of being ‘immortal’ in the abstract, in being the nation, in being the Government.
In my opinion the BOJ is performing better than the Federal Reserve or the Bank of England.