‘This Is Very Unusual’ – BoJ Plunge Protection Breaks Topix-Yen Link

Ok, so this is something we’ve noted before, but we wanted to flag it again because it’s a slow morning but more importantly, because it’s becoming more glaring.

Have a look at the Topix versus USDJPY:

And in case you’re wondering whether that is historically anomalous, the answer is “yes.” Have a look:

Any guesses as to why that might be happening? That is, anyone want to speculate on why it would be that the Topix no longer seems to care about the yen?

If you said: JPY16 trillion BoJ ETF portfolio you win a blue star. Don’t forget how absurd the Kuroda dip-buying has become. Recall this from Citi, which seems to suggest the disconnect you see above could in fact get even more pronounced:

The BoJ’s ETF purchases could be damaging the functioning of the equity market. It is well known that the BoJ buys ETFs on trading days when the morning close of TOPIX is below the closing price of the previous trading day. These BoJ ETF purchases therefore act as a built-in stabilizer for the equity market, and provide support in terms of supply/demand.

To avoid this risk, one option would be that the BoJ stops buying Nikkei 225 ETFs soon and shift to purchases of TOPIX ETFs. Currently, the BoJ is engaged in the “unintentional active management” of the high priced stocks in the Nikkei 225, and faces the medium-term risk of declines in the share prices of specific names. To ensure it has a reliable exit strategy, the BoJ may need to soon implement a “stealth operation” to substitute TOPIX-linked ETFs for Nikkei 225- linked ETFs.

Finally, just to drive the point home, here’s UBS’s Toru Ibayashi (bullet points compiled by Bloomberg):

• The Topix-yen correlation breakdown is “very unusual” and given Japanese corporate profit margins are at historical highs, shares are capped on the upside and a weaker yen would be the largest factor that could improve earnings
• The reason for the current low correlation between the two assets is the BOJ’s ETF purchases that were doubled from July last year that protects the downside of Japanese equities
• A stronger yen “historically and economically” should have a negative impact to Japanese corporate earnings
• By UBS estimates, a 1% change in USD/JPY should have an impact of 0.4%-0.5% in net profit for Japanese companies

#Winning???