Not price-keeping, but signalling at the Bank of Japan .
Nikkei reports on Monday that “Japan’s stock investment community is buzzing with rumors about the Bank of Japan’s ‘1% rule’.” Readers will recall that the BoJ started buying ETFs and JReits late last year, as part of a new, larger, attempt at credit easing. The move was a pretty big deal for the central bank. At the time, ETFs were estimated to have 13 times more risk than five-year US Treasuries
According to Nikkei, the central bank has enacted a new rule that sees it buying ETFs in an attempt to prop up stocks whenever the Topix index ends a morning session 1 per cent or lower than the previous day’s close. In fact, Nikkei says, the BoJ has bought ETFs through Japanese trust banks on all of the 18 days the Topix index fell by 1 per cent or more in the morning session since mid-December.
So what?, you might think. It could be a coincidence.
Except that the ‘1 per cent rule’ seems to have really embedded itself into the market’s consciousness. At least enough for people to very openly talk about it, even as the BoJ refuses to comment.
Here, for instance, is Capital Economics on the subject:
Several commentators have already noted that the pattern of these purchases has been consistent with a simple “1% rule”, whereby the Bank buys ETFs in the afternoon session if, and only if, the Topix falls by more than 1% from the previous day’s close in the morning session. The Bank has refused to comment on the criteria it uses, simply noting that purchases will be timed to “take into account the conditions in the market”. But a strategy of buying on dips obviously makes good sense. This strategy also appears to be working. As the pattern has become more established over the last few months, the Topix has typically rebounded in the afternoon session after the Bank of Japan has “intervened”, and this has probably limited the size of declines in the morning session too.
Nonetheless, we are sceptical that these purchases are making quite as much difference to the market as some suggest, or that they could ever set a solid floor. For a start, occasional purchases of less than ¥20bn are relatively small compared to the size of the market and other potential flows. They represent just 1.4% of the average daily turnover on the Topix (around ¥1,400bn), and only 0.01% of the market capitalisation (around ¥175 trillion). In contrast, net foreign purchases of Japanese stocks have averaged ¥145bn per week so far this year, or around ¥29bn every day.
Small they may be, but as Nomura’s chief strategist Seiichiro Iwasawa told us, they seem to act as a fairly successful signalling tool. Indeed, Nikkei says that on 44 per cent of days when the BoJ bought ETFs in response to a Topix decline, the stock market rebounded in the afternoon, compared to 38 per cent when it didn’t buy. But the effect seems to have strengthened since the market figured the pattern out, Nikkei says. Since April the ratios have switched to 67 per cent and 41 per cent, respectively.
Here’s some more from Iwasawa:
My impression is that domestic market participants know the rule behind the action of what the BoJ is doing … However the typical response [in Europe] was that [European] investors didn’t know about it. The BoJ makes it clear that they are not attempting to make a direct market impact, rather they intend to send the signal that the BoJ thinks the current market price is relatively undervalued … Once the performance of risk assets is relatively good then the BoJ’s purchases will not be so aggressive. They’ll only be really aggressive if the BoJ thinks the asset price is going to decline significantly. The BoJ is not trying to keep asset prices to the upside.
The whole thing raises rather weird psychological questions. Is knowing a central bank will prop up markets every time they fall below a set level really that good of a thing? And since when is central bank opinion more informed about ‘correct’ market prices, than the market itself?
(Oh yeah, since the whole financial crisis thing.)