The Bank of Japan owns my life

With Australia and Germany out, your editor’s interest in the World Cup has halved. But Japan and England play tonight.

Yesterday, in anticipation of the game, I bought beer made by the Bank of Japan (BoJ). At a shopping centre owned by the BoJ. Before driving home in a car made by the BoJ.

The clothes on my back were sold to me by the BoJ. And I suspect my phone’s internet connection is running through the BoJ’s systems.

The Nikkei Asian Review newspaper explains what I’m on about:

The Bank of Japan has become a major shareholder in nearly 40% of listed companies as the central bank keeps buying stocks under its ultraloose monetary policy.

Nikkei’s estimate of the BOJ’s effective ownership ratios showed that the bank was one of the top 10 shareholders in 1,446 listed companies out of 3,735 at the end of March.

A year earlier, the BOJ was a major owner of 833 companies, but that roster has expanded by 70% since. In addition, the bank is now the de facto leading shareholder in Tokyo Dome, Sapporo Holdings, Unitika, Nippon Sheet Glass and Aeon.

You’ll probably even find the BoJ operating one of its branches on your high street:

Fast Retailing, which operates Uniqlo apparel stores, has much of its shares tied up in ETFs. Every time the BOJ buys 1 trillion yen of ETFs, it is estimated to acquire 20 billion yen in Fast Retailing shares. If this pace keeps up for another year, Fast Retailing shares on the open market could all but disappear.

It’s not just companies that the BoJ is buying up. It now owns more than 40% of the Japanese government bond market, about the value of Japanese annual GDP.

The figures make my head spin. Despite the fact that I predicted them. More on that in a second.

I tried to explain the implications of all this to the Japanese household I’m in. Grandma hasn’t returned to her earthquake ravaged house in Osaka yet.

Interrupting some sort of rainy season related reed mat laying exercise, I declared that monetary doom was upon their home: “Did you know the Bank of Japan is a major shareholder in 40% of Japanese companies!?”

Instead of gasping in horror, the living room cheered in reply…

Perhaps some sort of deeply misguided patriotism has got the better of them in anticipation of qualifying for the World Cup this evening. Or they just don’t care.

Most likely, they gave me whatever response they thought would make me happiest – the Japanese way of dealing with monetary madness, among other things.

But as I grew exasperated by their reaction to the disastrous news, and had a go at explaining just how bad it was, I realised I don’t understand the implications myself.

The Nikkei stock index is up about 90% in eight years. Japan’s government is refinancing the biggest debt in the world without any issues. Inflation isn’t even at the BoJ’s target. Japanese politics is struggling with the appropriate date to let the emperor abdicate. Believe it or not, this may have a significant effect on the number of people coming to my wedding…

So, who cares that the BoJ is taking over my life? There are more important things going on.

Why you should have faith in the gods of central banking, for now

At our last Southbank Investment Research conference, I drilled a simple concept into the audience by making them repeat it.

For every potential crisis I listed, the audience chanted back, “Central bankers will print more money.” Here, you can try it yourself:

What if Brexit turns into a hard Brexit?

Central bankers will print more money.

What if there is a run on banks in Italy?

Central bankers will print more money.

What if the stockmarket falls in 2018 as central bankers confirm the tightening of monetary policy?

Central bankers will print more money.

What if the Chinese revalue the yuan, disrupting trade and debt repayments?

Central bankers will print more money.

What if American pension funds break the buck and stop paying out?

Central bankers will print more money.

What if the European Central Bank runs out of government bonds to buy under its rules?

Central bankers will print more money.

What if interest rates surge in Japan as the government bond market crashes?

Central bankers will print more money.

Sharp-eyed readers will notice that one of those crises will in fact not be fixed by central bank money printing. Find out more here.

It’s not just Japan, by the way. The Swiss central bank is buying up huge chunks of the American stockmarket. We know thanks to disclosure rules in the US. But if they’re buying US stocks, what else might they own?

Already, stockmarket commentators are worrying about what central bank intervention implies for the stockmarkets’ future. It won’t really be a market. And how will returns hold up in the face of sustained selling by central banks as they wind up policy? If that ever happens…

Offsetting disaster

Japan’s demographic decline is behind its wacky central bank policies.

The deflationary effect of a shrinking and ageing workforce that sells down its assets offsets the inflationary effect of central bank policies.

Or is it the other way around? Perhaps the BoJ is offsetting demographic decline.

Either way, central bank money is replacing the money of pensioners, retirees and missing workers in financial markets. Because deferred consumption is being replaced by new money, asset prices are holding up and consumption can be realised.

A central bank which prints money during boom times gets inflation. But as long as demographics and economics cancel each other out, the effect appears stable.

But it leaves society in a truly weird and meaningless position. A central bank that owns the government’s debt and the country’s biggest companies is a bizarre economy.

The Bank of England buys Britain

Let’s explore the potential for a Japanese future in Britain. Our demographics aren’t as bad, but we’re not far behind.

What if the Bank of England bought up the FTSE with newly created pounds? What would it even mean? Where would it leave us?

What if our central bank simply funded your retirement by buying your investments and bailing out the government indefinitely?

As long as they don’t overcook it, the inflation would only be offsetting the built-in deflation coming from underfunded pensions and demographic change.

Have central bankers solved all the world’s problems by printing money?

Only as long as people put up with the side-effects. And in one place, they aren’t.

Until next time,

Nick Hubble
Capital & Conflict

Category: Central Banks

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