Japanese Whale

Pfäffikon SZ, Switzerland – Until recently, the monetary hocus pocus was relatively easy to understand. When a commercial bank did not have enough cash on hand, they could always knock at the central bank. An excellent idea that there is always someone who has available a helping hand. But there is an added dimension. The central bank is now also operating on the stock exchange; the Japanese whale is born.

Savior
Mario Draghi of the ECB presents itself as the savior of Europe. However, investors must voice doubts about this statement. Timothy Geithner, former U.S. Minister of Finance, mentioned it publicly as follows: “Mario Draghi had ‘no plan’ and was bluffing when he claimed “We’ll do whatever it takes.”” Geithner merely confirms that Draghi has no idea what he is doing, which is obviously a painful observation and will do the confidence no good. The fact is that the ECB is buying corporate bonds, which will provide companies with liquidity via a detour. Draghi is often asked whether he will also buy stocks, but for now, it seems he does not want to take this route yet, fortunately.

Japan
In Japan, meanwhile, a lot has changed. The Central Bank of Japan (BoJ) now owns approximately 34.5% of the Japanese bond market, and this figure is likely to reach 50% by mid-2017. Perhaps more remarkable is that the BoJ is also buying shares. And even when BoJ cannot be found in the official records of substantial holdings, the bank is continuously buying ETFs. According to Bloomberg, BoJ would already be a top 10 shareholder in the widely supported Nikkei 225 Stock Average. The interests of BoJ would surpass even those of the largest asset managers in the world. All financed with printed money, although that is no more than an accounting trick nowadays, carried out cunningly with the backing of the unsuspecting Japanese taxpayer.

Hedge Fund
Central bankers are increasingly behaving more like hedge fund managers with unlimited filled bags. In Japan, we can prepare ourselves to the question of what will happen if the BoJ has the whole country on its balance sheet? If it comes this far, no one knows, but they are making their way. The situation in Japan is not only defined remarkable and undesirable from an investment perspective. Also from the field of corporate governance, the current policy of the BoJ must be called into question.

Investor Warren Buffett recently mentioned that he would still like to experience how the situation in Japan will unfold. As a long term investor in Japanese shares, you are already not sitting comfortably at your seat this year. But what will happen if the BoJ decides to step suddenly out of the stock market? Central bankers will do better to limit themselves to simple and sound banking. We need a Japanese whale ‘like a hole in the head’.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.