Friday, August 19, 2016

The excesses of QE - Japan Edition

There are public sector companies and then there are public sector companies. In the former, as in the erstwhile Communist and Socialist countries, governments physically established and owned businesses. The latter is a neat twist to ownership, where private sector establishes companies, float them in the capital market, and then government becomes the majority share-holder in those companies! Thanks to the never-ending adaptations of quantitative easing, Japan has become the progenitor of this new economic model!

The Bank of Japan (BoJ) had embarked on a massive quantitative easing program, including purchases of Exchange Traded Funds (ETFs). As of June 2016, the Bank of Japan (BoJ) owned 60% of the country's ETF market and is now a top-five owner of stocks in 81 out of the 225 companies that make up the Nikkei Stock Index. Last month, it increased the annual ETF purchase target to 6 trillion yen. It is now estimated that the ETF purchases will make the BoJ the largest shareholder in 55 of the 225 Nikkei stocks and top 10 holder in 99% of its companies by December 2017!
The BoJ's ETF purchases are rapidly depleting the free-float of shares (or those available for trading). As the free-float is expected to rise above 50% in many companies, market liquidity will be squeezed with increased volatility.

The apparent logic of all this is that ETF purchases will boost economic activity, enhance risk appetite, and thereby raise inflation above two per cent. There is a hollow ring to this, given the disproportionately low returns from years of expansionary fiscal and monetary policies. Instead of such hugely risky experiments, Japan, as I blogged earlier, should get down to more fundamental labor market reforms on migration and women workers to address its massive demographic challenge. 

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