The Japanese stock market has become a case study of central-bank manipulations, and of what happens eventually as reality cannot be eliminated forever.
On Thursday, the Nikkei, after a horrific 800-point or 6% dive on a staircase to hell, or to 12,416, whichever came first, recovered a few hundred points, then climbed back down that staircase and ended the day at 12,445, the lowest close since April 3, down 844 points for the day, the second largest swoon so far in 2013.
The largest swoon this year? May 23, a 1,460-point crash, or 9.2%, from its intraday peak (after a 300-point jump that morning) of 15,943 – the highest most euphoric point since December 2008. Now the Nikkei is down 21.9% from that peak, and in bear market territory. Both the Nikkei and the Topix dropped below the 100-day moving average during the day, which in itself triggered more selling, as these technical indicators, and the buy-sell behavior they engender, become self-fulfilling prophecies (for a while), not only on the way up, but also on the way down – their raison d’être; otherwise they’d be utterly useless.
It took the Nikkei 50 days – from April 3 to May 23 – to make it up that far, and just 20 days to come back down. Up by escalator, down by elevator (with ear-popping speed).
This is what happens when a stock market gets inflated by a central bank: promises of boundless money-printing attract the hot money that causes values to balloon to ridiculous highs in the shortest time. Then something happens, some silly event, the recognition that enough money has been made, a rumor that some big hedge fund is bailing out, a disappointing statement by the Bank of Japan, something... and some of the hot money suddenly has had enough, tries to take profits, tries to bail out, just when there are not many euphoric buyers left, and what you hear is a giant hissing sound. And what you get is capital destruction and wealth transfer.
Thank goodness, for the Bank of Japan, there is nothing like a good stock-market crash to prop up the otherwise wilting market for Japanese Government bonds. They’ve been an awful investment recently: the 10-year JGB has been yielding below 1% even though the BOJ promised to create 2% inflation. The official plan is to hand JGB buyers a loss on an inflation-adjusted basis. So investors have been bailing out of JGBs while the BOJ has been gobbling them up through its massive bond-buying program. Yields have been jumping up and down in the most tumultuous manner, rising for the 10-year JGB from the freaky 0.315% low of April 5 to briefly kissing 1% on May 2, and panicky bondholders have been pulling out their hair along the way.
Since then, JGBs have “stabilized” somewhat, with yields retreating below 0.9%. But during yesterday’s stock market massacre, these despicable JGBs suddenly seemed like a pretty good deal again, given the choice between losing money fast in stocks and losing money more slowly in JGBs. In response, yields on the 10-year JGB briefly plunged from 0.88% to 0.80%, only to rise back to 0.86%.
In support of its machinations, the BOJ has stated repeatedly and explicitly that it is trying to inflate the stock market to create the "wealth effect" – that ephemeral and treacherous impetus for people to spend money they see on a computer screen but haven’t realized yet and haven’t paid their taxes on yet. But on average, they actually can’t spend the money they see on that screen because they’d have to sell to do so, and pull their money out of the market. It would cause a crash. And annihilate that beautiful wealth effect.
Instead, central banks use the wealth effect to lure consumers with a vision of wealth so that they’d spend their savings, or spend with their credit cards. And then, when the market does crash, consumers are left holding the bag: the vision of wealth has dematerialized, their savings have been decimated, and credit card bills have piled up. An insidious central bank strategy.
But that’s secondary for the BOJ. Its primary concern is the enormous government bond market – and the banks, retirement funds, and other institutions that own a big portion of these crappy bonds. They're the lifeblood of the Japanese economy. And when push comes to shove, the BOJ lets stocks plunge in order to support bonds – as it has done on numerous occasions.
It’s hard to blame the BOJ. There are no more good options available for Japan. The economy has become physically dependent on out-of-control government deficit spending – with half of the spending being borrowed money! The debt, now over 200% of GDP, is so huge and growing so rapidly that reasonable solutions no longer apply. But reality cannot be pushed out forever. Someone eventually MUST pay for it all: the bondholders, the taxpayers, or all Japanese (via run-away inflation).
The one thing we know from Abenomics, and from the policies of all prior governments: they’ll try to push the day of reckoning out as far as possible, hopefully beyond their time in politics, and hopefully with enough warning to allow the elite to protect itself from the fallout. The BOJ’s job is to make that possible.
Abenomics has its detractors – in peculiar places – and Prime Minister Shinzo Abe must be experiencing some interesting pillow talk. His wife has attacked one of the major components of his economic policies, the formerly omnipotent nuclear power industry that he is trying to restore to its former glory.