Oh, this is great, truly lovely

Snippa:

In 2017 I wrote a blog on an obscure subject: Japanse Exchange Traded funds. I said at the time:

OK:

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, Spudda:

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.

10 thoughts on “Oh, this is great, truly lovely”

  1. 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.

    A textbook example of the scientific method in action, from the furious-fisted blogger in the unimpressive end terrace in Ely

  2. How in buggery did the central bank end up with $256bn in ETFs on it’s books? Ok, it’s Japan, they do like a bit of cross-holding now and then, but really?

  3. I actually believe Murphy is a bit thick.. too often he steps out of his comfort zone and announces on things he has no insight on., this is one of those occasions

    Good to see a couple of old punk rockers pulling him up.. Topper I hope is out of rehab and back on the snares, and good old Charlie still a UK Sub at the age of 75..

  4. Dio; buggered if I know. Thing is, whilst Bundesbank v2.0 is concerned about inflation getting too high, the BoJ is worried about it being too low (actual <1% for donkeys, desired 2%). Trying to figure out how the BoJ thinks this is going to work, given that they apparently hold over 75% of ETF issuance, where the entire program might have resulted in Japanese equities rising to a 20% premium. Weird.

  5. Bloke in Costa Rica

    Does anyone remember that avant-garde “artist” whose gimmick was pumping a couple of pints of paint up his arse and then squirting it all over a canvas? That is essentially Spud’s approach to blogging.

  6. Bloke in North Dorset

    How in buggery did the central bank end up with $256bn in ETFs on it’s books? Ok, it’s Japan, they do like a bit of cross-holding now and then, but really?

    I do not know much about these things so this is a genuine question: Is it part of their efforts to create a bit/lot of inflation? A bit like QE?

  7. It’s beyond me. Japanese companies often hold shares in the companies with which they do business but I would have imagined that most ETF holdings are overseas institutions. How the BoJ buying ETFs from Vanguard and Co will expand the money supply is a question only Captain Potato could answer

  8. Yes, the BoJ has been trying to pump up Japanese inflation, by buying up Japanese bonds and shares as well. (This might work either because it makes private sector Japan feel richer, so it spends more; or because it just overloads private sector Japan with cash, so it spends more.)

    Buying ETFs means that the BoJ dodges tricky decisions about buying individual shares.

    Murphy’s original contention about liquidity was, not for the first time, economically nonsensical. The BoJ’s decision to lend out its ETFs will improve liquidity in the market, but in the wrong direction as far as Murphy is concerned – it will make it easier for other market participants to sell short.

  9. BiND; Yes, pretty much, but take a look at the Lost Decade;

    https://en.wikipedia.org/wiki/Lost_Decade_(Japan)

    The bubble shows up as the Jap Warrants / CBs market, and the BoJ’s been getting all unconventional WRT policy since the late nineties, about ten years before the GFC and QE in the west.

    It’s not just inflation, but output, wages, what have you, as well, and nothing has really worked since then.

    The cross-holdings bit was a bit of an obscure reference to the zombie firms back then. Post-war, the Japanese ended up creating a fortress such that the gaijin couldn’t easily take over domestic firms, via equity cross-holdings between each. They got quite large, and then it bit them on the arse, as you couldn’t force a revaluation of any single firm without others taking a significant hit.

    Dio; there’ll be domestic versions, and the Japanese markets are still largely dominated by domestic investors. Seems a bit odd thirty years later, but I guess the savings rate is still high.

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