The dealings of the Bank of Japan (BOJ), creating a stranglehold on the Japanese market, reads like a cautionary tale for economists. The bank recently recorded a $130 billion USD profit! On the surface it sounds incredible. Yet, despite this newfound wealth for the BOJ, it seems the economy continues to struggle. Wall Street Journal reports:
Politicians have noticed the contrast between a struggling economy and a roaring stock market in which government entities are the biggest players.
The disconnect between Wall Street and Main Street is not wholly unique to America. Even in Japan, the stock market reaches new highs despite a struggling economy. To help those in need, the country is seeking ways to distribute the BOJ’s profit, noting:
BOJ faces growing pressure to stop acting like the Tokyo whale and find ways to spread the wealth. Some are calling on the BOJ to hand out shares to the public or use its gains to seed corporate innovation…
The distribution has yet to be decided. But what is the cost of this gain to society and how long did it take to get here? Consider:
Over more than a decade, the Japanese central bank, uniquely among its global peers, has poured hundreds of billions of dollars into local equities and now owns about 7% of all the shares traded on the Tokyo Stock Exchange’s first section.
Not everyone agrees with this strategy. As described by a former executive of the BOJ:
It is unhealthy for a central bank to be the biggest shareholder and have its presence grow even further in a market that serves as the foundation of capitalism.
Free market advocates undoubtedly agree. But this opinion does not outweigh that of Mr. Kuroda, the Governor of the BOJ, who without reservation, declares:
I haven’t seen any severe damage to market functions or any big issues involving corporate governance…
He claims their policy “helped stabilize the market during its brief crash in March 2020.” As explained, central bank money was used to “prop up the stock market, hoping to revive the animal spirits of investors.” Additionally:
Mr. Kuroda hoped rising stock prices and other monetary easing would trigger robust investment by companies and consumer spending. He tied the stock purchases to his 2% inflation target.
How telling that we still hear about these “animal spirits.” This poorly defined, near mythical force, which guides investors to find confidence in their actions, shows the disconnect between planner and population. Ironic an entire economy can be planned off ideas no different than fairy tales.
We can learn a lot from Japan, starting with how to quantify this problem. At over $300 billion USD, the cost of buying these shares is momentous by any measure. We’ll never know what would happen if the bank never did the purchases; however, because of these purchases, billions of dollars have entered the stock market altering the valuations of countless publicly traded companies. Central bank perpetual stock buying also changes the risk appetite and investment decision making for both investors and companies as well.
Stock purchases can be likened to stimulus checks for shareholders. Rather than the government issuing checks to certain members of society, under the stock approach, the central bank issues checks to existing stockholders. The $300 billion has increased the price of stocks, yes, but the money is received by those who sold their shares to the bank. As to what the sellers ultimately do with their realized gains, and how this $300 billion impacts society, is anyone’s guess. But it’s fair to say it has similarly altered prices, profit, and decision making for countless market participants.
The BOJ owns 7% of publicly traded stocks, 7% more than they should in a free and unhampered market. Unlike a fairy tale, there are no animal spirits, there will be no happy ending, and there is no exit strategy which doesn’t include crashing the entire stock market. If there are lessons to learn from Japan, it would be to re-examine our own relationship with the Federal Reserve.
