Japan’s central bank is the biggest equity holder on the Tokyo Stock Exchange. What was an institution set up to manage interest rates now owns 7% of all stocks on the market.

Pokémon, raw fish and the Central Bank’s balance sheet… all undeniably big in Japan. The Bank of Japan owns 7% of all Japanese shares on the Tokyo Stock Exchange. Not only are they the biggest shareholder in their own market, no other central bank owns stock at all.

Why has this even happened? Let’s rewind a little bit. It all starts with monetary policy (MP). For decades, the central banks managed economies by raising and reducing interest rates. Rates would rise to slow economic growth and fall to promote economic policy (conventional monetary policy). Then the GFC happened and rate tinkering lost its effectiveness.

Central banks were forced to try new, unconventional measures. That’s where the “money printing” memes and “unlimited stimulus” headlines come from.

Japan has been in a tough economic situation for a while now. It may seem impossible, but the world has struggled to get inflation going for years. While it’s not pleasant when prices start running too hot, some inflation (2-3%) is a good thing. It allows wages to rise and economies to grow. Japan’s GDP is lower today than it was in the 1990s as growth stagnates. For reference, America’s GDP is up 150% while China has grown by 2,000%. The Bank of Japan has turned to the stock market as one way to correct the ship.

Why does the central bank even care about the stock market? The disjunction between stocks and economies seems huge at times. Just look at 2020; when the world was shutting down and the market rallied over 20% during the year. But at the end of the day, stocks are real companies providing real foods and services to the economy. The BoJ supporting local companies theoretically helps local businesses grow. Critics argue that the bank supporting companies regardless of their fundamentals isn’t helping local markets. In the BoJ’s eyes, they’ve tried everything. The country was one of the first to send interest rates negative in 2016. That’s right, you’d lose money as it was stored in the bank in an effort to promote spending.

The Bank had been buying Nikkei 225 ETFs (Japanese S&P 500) from 2010 to mid-2021. Their biggest holding was Fast Retailing, the owners of Uniqlo by the end of the program. Now the question is what do they do with the US$450b in assets still on their books?

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