Interference in the stock market by Japanese government shows wary signs

Much of this year's economic debate has centred around global central banks and more so those operating in advanced economies who have taken to exhausting the limits of its policies to new extremes in introducing bold yet questionable moves in shifting interest rates below zero for the first time in recorded history in an effort to curb a decline in economic activity.

Besides this, another crucial function of monetary policy is the asset sales and purchases that take place as part of the process of decreasing or increasing the money supply respectively. However over the years since the Financial Crisis central banks have announced numerous rounds of purchases all of which has created a shortage of appropriate instruments to use when stimulating.

The Bank of Japan has faced this dilemma for some time and has resulted in it now owning over half of the listed Japanese Equity ETFs. Not only is this worrisome but the continuation of this policy measure provides doubt concerning the true valuation of equities considering the artificial demand stemming from these purchases.  

Furthermore Japanese equities aren't only finding favour from the BOJ but also the Government Pension Investment Fund of Japan, the world's largest pension fund. The fund shifted it's strategy almost two years ago by opting to focus it's accumulation into equities whilst squeezing out bonds, a decision that was largely influenced by Shinzo Abe's government who saw the frightening outflows from Japanese equity markets.    

Bank of Japan and Government Pension Investment Fund own largest shares in 474 of ~1970 cos. listed on Tokyo Stock Exchange: Nikkei

— zerohedge (@zerohedge) August 28, 2016

However the fund made headlines for all the wrong reasons recently when it reported a loss of $52 billion for the quarter ended June saying it had been affected by the aftershocks of Brexit but more importantly the strengthening of the Yen, a factor that's been troubling government's for some time, leaving many wondering if the government's efforts to prevent a fresh crisis had failed in its entirety.

Combine the two organisations stakes together and they register as the largest stockholder in approximately 25% of all companies listed on the Tokyo Stock Exchange.

There can only be one conclusion when confronted with the facts, Japanese citizens don't share the same confidence in the country or its economy as its government does. If they did the government wouldn't find the necessity to hold such a significant stake to hide the truth...

Consider for a moment the scale with which an unwinding of such investment would demand from interested buyers.

Perhaps an economy that doesn't suffer from a lack of structural reform that subsequently weighs down efforts by government to turnaround the situation yet falters the economy at every site of a recovery.    

Japan's economy proving policymakers wrong

It wasn't long before the Japanese economy proved contrast to policymakers belief  that exceptional stimulus measures coupled with an experimental and untested use of interest rates below zero are necessary means to break out of decades long stagnation and deflation with the latest printed figures indicating the nation's economic activity only grew 0.2%  in the second quarter of 2016, a paltry increase that's bound to pressure the government to deliver expectedly.

Having written about the topic of Japan on numerous occasions my opinion has yet to change regarding the type of policies employed by both monetary and fiscal authorities who have failed to drive the economic progression towards a better outcome.

In recent weeks we heard a bold but skeptical plan hatched by Japanese prime minister Shinzo Abe to expand his government's budget in an effort to support the economy, a frequent past time that's featured more distinctly as evidence clearly points to policy failure having promised to save Japan from economic implosion.

Japan's economy stalls in April-June, casts doubts on Abe's policies https://t.co/AIGc6FpAlG

— Jennifer Ablan (@jennablan) August 15, 2016

His partner in crime Haruhiko Kuroda hasn't had luck either in convincing buyers in the Japanese Yen of the overstated strength they've poured into the currency in the last year. The devastating impact this is having on the country's export clearly shows up with relenting desire to derail future prospects.

However no confidence can be found when the actions of the Bank of Japan imitate that of its counterparts and vice versa with a "follow the leader" mentality attached closely with every desperate measure taken by developed world economies in a bid to save themselves. Actions which are spurring on fresh currency wars amongst each other.

If the scale of stimulus were to be increased to a larger amount than what we're witnessing currently we are certain of financial catastrophe that would overshadow the haunted past and when considering the extent to which policymakers are willing to extend monetary programs, the ease of which to reach this state is not out of grasp.

Once again it cannot be stressed enough that world leaders need to come to the realisation that the global economy doesn't require infinite amounts of money supply to move the dial but a closer look into the shifting dynamics that are having a greater effect on the economic cogs that motion the mechanisms of growth

Japan's delay of a sales tax hike merely spells doom

In an expected move Japanese Prime Minister Shinzo Abe delayed the implementation of a sales tax hike following the failure of the once prospective Abenomics that's seen Japanese debt balloon outwards placing its citizens with grim prospects of the future. The move will bring short term gain to an economy that's been battling deflationary pressures together with contractionary expectations related to the health of economic activity in the country.

Abe didn't deviate much from what he had said last week when Japan hosted the other 6 remaining members who make up the economic council of G7(otherwise known as Group of 7). He reiterated the risk the global economy faces due to the slowdown in activity in emerging market nations saying China had influenced most of the current downtrend being experienced adding that the adverse effects felt by most nations around the world had taken the wind out of the sails of a planned economic recovery that had been underway for some time.

As much as these economic conventions help guide investors on the course of direction the world economy is headed in, very often they're used to test alliances with the case of Japan's ties to China standing on shaky ground having centuries old rivalry with its Asian neighbour.

Trying to point out China's failings while ignoring their own dilemma of an increasing debt horde is quite rich when coming from the likes of Japan.

S&P says #Japan sales tax hike delay makes 'some sense' (as debt to GDP has grown to 240%). https://t.co/fdwLDUssIQ pic.twitter.com/2ScgLFnVv5

— Holger Zschaepitz (@Schuldensuehner) June 1, 2016

Credit rating agencies have already started circling with a handful of critics painting a woeful picture of the outlook of the Japanese economy if it doesn't properly arrest its debt problems that sits at the highest levels to GDP amongst all countries in the world. Furthermore the situation only becomes bleaker when you weigh up the poor take up of prime minister Abe's stimulant fiscal measures that produced the tiniest amount of excitement at the beginnings of its undertakings that subsequently fell by the wayside in recent years.

Refusal to concede defeat, Abe's lack of sensibility has prompted Bank of Japan Governor Haruhiko Kuroda to rush in and "save the day" as some might term it, when in fact the policies churned out from the monetary body is in direct conflict with the goals of the economy and its people.

The market never lies and none can be truer when observing the abnormal strength of the Yen versus the US Dollar leaving many theorist scratching around for answer after the BOJ dropped interest rates below zero and announcing more stimulus measures to an already extended program.

Supranational monetary organisation the International Monetary Fund have recently warned developed nations that the limits of monetary stimulus are wearing thin and stressed the need for governments to begin "structural reforms" of their economies if they want to avoid riding into economic catastrophe further down the line.

But again the powers that be continue to steer their economies in the opposing direction of rationality with Japan being a basket case leading the forefront of technological advancement in an economy yet failing to take into account the impact such changes bring onto the decision making process of its citizens.

Looking at reasons for why conventional economic policies aren't working isn't enough and should instead be viewed as a need to push past old beliefs by exploring the possibilities of exceeding the bounds of theories that have laid around for decades and renew the study of economics as it was intended in the formative years of Adam Smith.