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Is it possible for the next market crash to come from Japan?
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Loading...Let’s forget for ten minutes the upcoming Q3 reports (supportive for stocks), US policy risks (probably the biggest medium-term risk for stock markets), hurricane-related diversions and North Korean rumblings - and turn to a pretty fundamental issue, most likely the biggest one in contemporary capital markets: Central bank interventions in and manipulation of capital markets.
Let's pay attention to the Bank of Japan. BoJ leads the list of central banks in possession of assets in its balance sheet. The levels have grown to almost the size of national GDP.
It’s the latter which is of particular interest for stock investors. There had been an interesting article in Bloomberg highlighting the distortions the BoJ is creating in the Japanese ETF market as the BoJ accounts for 75% of the total ETF market.
However, it’s not a silver bullet for the long run. The Topix peaked in August 2015 and is still some 4% below the level back then. In this period, the net asset value of BoJ ETFs has risen by close to Yen 11 trillion or > US$ 100 bn (based on Bloomberg data). In the year to date, the Japanese market has underperformed the US and Euroland.
Over time the BoJ has become increasingly important. Its share of the Japanese stock market has risen from 0% in late 2010 to now 5%.
The interesting point is that the incremental gains of one percentage point in ownership are realised in an increasingly shorter time period. It took 4 1/2 years to reach 2%, but only 2 1/4 years to add another 3 percentage points (to the current 5%). This reflects two patterns: the declining positive impact of BoJ buying on stock prices and the increase in buying volumes by the central bank.
Investors should not be fooled. This is serious and creates massive long-term problems:
At some companies, the BoJ seems to have already reached a visible double-digit stake. What is going to happen when the BoJ tries to exit the stock market again? Can a stock market crash ?
Central banks like the BoJ want to "help" markets but they risk destroying them.
Source: Bloomberg Pro Terminal
Junior Trader Stefan Panteleev
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