Plunge Protection And Policy Errors

Plunge Protection And Policy Errors

The BoJ bought ETFs for the first time in two months on Monday, as Japanese equities slumped as much as 4% in what amounted to a catch up trade with Wall Street, where stocks dove Friday on concerns around a hawkish Fed.

The bank stepped in with 70.1 billion yen in purchases after the Topix fell 2.5% over the morning. The last time the BoJ bought ETFs was on April 21.

Ultimately, the Nikkei and the Topix fell 3.3% and 2.4%, respectively, to start the week. It was another manifestation of the “reflation-off” trade that hit cyclicals last week in the wake of the Fed’s pivot at the June meeting. The Nikkei hit a three-decade high in February after surging more than 80% from the pandemic lows (figure below). It’s been a sideways slog since, as investors fret over the fate of the Olympics and concerns over a lackluster vaccination push.

As a reminder, the BoJ scrapped an annual purchase target for ETFs following a policy review earlier this year, but it reserved the right to intervene in order to — and I don’t know any other way to put this — keep stocks from falling “too” much on bad days. The BoJ is a dip-buyer armed with a printing press.

As of end-March, the BoJ held 51.5 trillion yen in ETFs, with a paper gain of more than 15 trillion yen (figure below). May was the first month the BoJ bought no ETFs since 2013. The “streak” is over (and yes, that’s supposed to be funny.)

As of last year, the BoJ was the largest owner of Japanese stocks, surpassing GPIF.

Meanwhile, the duration rally looked set to accelerate — before eventually abating entirely during the US session. At one point, 30-year Treasury yields fell below 2% for the first time since February. They’d later cheapen materially, all the way back to 2.10%. Monday’s reversal notwithstanding, global curves flattened in tandem with the US in the post-Fed shakeout. As Bloomberg noted, “investors [are] speculat[ing] that other central banks can afford to turn more hawkish without fueling excessive gains in their currencies.”

The BOE meets this week. It’ll be Andy Haldane’s swan (or hawk) song.

In a Monday note, Rabobank’s Michael Every wrote a bit about the reaction (to the Fed) in the US bond market. “The overall impression is of the market screaming ‘POLICY ERROR!’,” he said.

“It will likely take equities tumbling to get the Fed’s full attention, but even so, last week’s volatility could potentially be a sign that US policy tightening is over even before it began,” Every added. “Unless we get a shift of fiscal policy and supply chains.”

9 thoughts on “Plunge Protection And Policy Errors

  1. In a world of MMT it is about currency’s relative value and internal inflation.
    Equities provide disposable income and can be equated as part of the volume of money.

  2. The Fed cannot tighten without policy first building real growth. If the fed inflates prices to keep the economy moving in lieu of policy then any tightening is essentially deciding to end the economy. Policy needs to be the driver of the economy but it’s still brain dead on the operating table on life support and I’ve yet to see Dr. Frankenstein arrive at the party.

  3. If the transmission channel is gummed up in one direction are we certain it isn’t gummed up in the other direction as well?

    Ie, will an asset rerating be catastrophic?

  4. Considering that BOJ is using a virtual printing press to buy ETF’s, and that the value of those ETF’s is largely built on imaginary wealth, how can one ascertain what the real value of those assets are? The BOJ could sell off some of it’s gains but that would certainly devalue the entire exchange by macro levels which would be counter to why they are making asset purchases in the first place. So the BOJ has to continue buying these assets to keep them moving positive but the reality is those shares don’t actually exist since the BOJ is just buying and holding with an ever devaluing currency. At some point the BOJ will be the largest holder of assets on these exchanges meaning that over half of the shares propping up these assets don’t realistically even exist. What’s the end game here? How does this end any other way then the entire system ultimately collapsing at some future date?

  5. This is in fact the test of MMT which as everything ,in the World we live in has it’s limits. I am not disputing the concept with this comment just it’s relationship to infinity…

    1. I have disputed the same thing. However the limits May well be different for mmt spending on the poor versus the spending on the financial assets of the real wealthy. That is the federal government will get larger amounts of tax receipts if they spend more on the poor and which will mean that they will have to borrow less can function even with less borrowing. Less borrowing should in fact deflate assets even more.

      All of that could be the very real reason that the wealthy are scared shaking in their boots about the prospect of giving small amounts of money to the poor. The politicians the government and most business will figure out that the wealthy don’t benefit them at all. It is only the poor that pays the rent.

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