In 2017 I wrote a blog on an obscure subject: Japanse Exchange Traded funds. I said at the time:
The second is broader, and is a liquidity issue. If there is a run on these funds in the event of a stock market downturn I can see them adding to liquidity pressure as they effectively leverage the underlying assets by double quoting them. This could ratchet a downturn in market sentiment and add to instability, effectively reflecting the burst of a double bubble. Anything that can do that is dangerous.
Well, no, that’s nonsense, but OK. Now, today:
The Bank of Japan has launched an unusual lending facility for exchange traded funds as it tries to mitigate the market impact of its ultra-aggressive monetary policy.
Under the new facility, brokers will be able to borrow some of the central bank’s ¥28tn ($256bn) holdings in equity ETFs for up to a year, at interest rates to be determined by auction.
The new facility, first announced in April, is intended to boost liquidity in a Japanese ETF sector dominated by the central bank, which owns two-thirds of the total outstanding stock and has come under fire for allegedly distorting the market.
Hmm, interesting. The connection between those two is difficult to see. Other than that they’re both about Japanese ETFs. For one is about the EFTs themselves contributing to a lack of liquidity in the event of a market downturn. The other is the BoJ saying that their own buying is leading to a lack of liquidity in ETFs. Therefore they’re launching a borrowing program. You know, just like institutions do, lending stock and all that.
So, they admit the policy was a mistake.
And they admit that there is a real problem with liquidity.
I rest my case.
Those who devote themselves to dogma cannot see real issues arising. Thankfully, some of us can.
Remarkable, isn’t it? ETFs causing a lack of liquidity is different from the BoJ causing such a lack in ETFs. But The Murphmeister is still right. ‘Cuz, you know, something happened in Japanese ETFs.