The Wall Street Journal recently reported that, over the past two years, the Bank of Japan has purchased stocks on 96% of the days when the market opened lower or closed lower after initially opening higher. In this two-part series, we’ll pick up where the Journal left off and examine how this activity by the BOJ — now the single biggest owner of Japanese stocks — has led to a bigger stock market bubble than in 2000 or 2007.
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“Looks harmless enough. I’ll just give it a little poke and… hey, what the–!?”
What do you call it when it looks like a market, walks like a market, sometimes even quacks like a market… but it’s not like any market ever before seen on this earth?
One of the more interesting articles I’ve seen in quite a while is this Wall Street Journal article published Wednesday that discusses how, for the past five years, the Bank of Japan has been — and, you should probably sit down for this — manipulating the markets! I know, I know. Shocking, right?
This is hardly news to pebblewriter members. We’ve lamented it ad nauseum for years. But, the article caught my eye because it’s one of those rare few mainstream media articles that openly discusses a practice which many investors regard as conspiracy theorist delusions.
The Prologue
The BOJ first obtained approval to buy ETFs and REITs back in 2010. Like the S&P 500, the Nikkei 225 had tumbled about 60% during the crash. Unlike SPX, which didn’t bottom out until March 2009, NKD hit bottom (7425) in October 2008. And, in a remarkable coincidence, again in March 2009 (yes, exactly 7425.)
Also unlike SPX — which regained a Fibonacci 61.8% of its losses by April 2010 — NKD regained only 38.2% (also a Fib) of its losses. On the way to there, it dipped to 9490 — not once, but twice.
So, when it dipped a third time (yes, to exactly 9490) it set up what we chartists call a Head & Shoulder Pattern. The chart below shows each of the two shoulders marked with a red “S” and head with an “H.”
The only thing necessary to complete the pattern was a substantial bounce and a subsequent drop below that dashed red line (the “neckline”) at 9490 — which was delivered on August 24, 2010.
The completed pattern targeted 7095 — a huge 25% decline. The Japanese needed a 25% correction like they needed a 9.0 earthquake.
Enter the Bank of Japan, which had plenty of experience with quantitative easing (QE) of the government bond buying and currency manipulation variety. Maybe, just maybe, they could help out on the stock market front as well. From the WSJ:
BOJ officials used to be cautious about purchasing ETFs, worried that it could distort market activities and put the central bank’s own financial health at risk. But, under pressure from politicians following the global financial crisis, the bank changed its stance in late 2010.
“We led the cows to water, but they didn’t drink it, even though we told them it tasted good,” Miyako Suda, who was a board member then, wrote in a a 2014 book discussing monetary easing at that time. “So we thought we should drink it ourselves, showing them it was tasty.”
The BOJ rushed through a plan to purchase ¥76 trillion (then, about $1 trillion USD) in “tasty” financial assets that included ETFs and REITs. From the Principle Terms and Conditions:
The rumors that the BOJ would actually be buying stocks — trillions of yen in stocks — were, alone, enough to send the Nikkei scampering back above that neckline. By the time the program was actually instituted, NKD put 9490 in its rear view mirror for good.
Or, so everyone thought.
next: the pods open…