Thursday, December 18, 2008 2 comments ++[ CLICK TO COMMENT ]++

Japanese government considering buying stocks

Well, the Japanese government is considering buying shares on their stock exchange:

Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying.

Needless to say, the notion of a free market is kind of dissapearing by the minute. Japan is further along the deflation cycle and is simply following strategies put forth by mainstream economists such as Ben Bernanke (recall that one of the later tactics, after others fail, is to buy, first, bonds, then, potentially, stocks.)

I am not familiar with the economic implications of the Japanese stock buying tactic but I am not in favour of it. Perhaps it's a selfish desire since I'm near the lower class but whatever it is, I would prefer if the government dropped money out of helicopters onto the poorer section of society instead. Buying shares simply transfers wealth from the citizens to the wealthy since the top 30% of wealthy tend to own 70% of assets in nearly all countries (for reference: in America, the top 10% own 85% of stock market wealth. The middle class' wealth is concentrated in real estate. Have to dig up Canadian numbers but I believe they are similar with a bit better distribution.) Such an action also opens up room for gross corruption, depending on which companies are bought and who gets to decide. We have already seen the decision by the Bush administration to prop up AIG, while others seem to have been rejected without any public explanation.

Buying shares also distorts the free market and sends all the wrong signals. Trying to read the situation from market price movements will become next to useless in Japan.

Having said all that, this is not without precedent. The Hong Kong government started buying shares en masse in 1998 and actually turned a profit on it. I am not well versed in history but I think this is the first time a government managed to successfully intervene in a major stock market of a developed country. Unfortunately for Japan, the stock market is way too big so the ultimate impact is uncertain.

One positive thing working in the Japanese government favour is that their stocks appear to be undervalued. Most of their stocks are trading below book value. Valuation is obviously in the eye of the beholder but buying shares trading below book, even though the book value may not be reliable, tends to be a conservative strategy. I think value investors, even if they may not approve of the tactic, would probably agree that there is a high chance of Japan turning a profit on its "investment".

I hope this doesn't set a bad precedent and result in other countries buying shares on their markets too (most likely country to do something similar is Russia.) Some readers of this blog may like it since they can profit from it but it is a dubious tactic for the economy. If the Japanese government was really concerned about stock prices, it is far more effective to make Japanese companies shareholder-friendly. They can start by getting rid of their cross-shareholder structures and treating shareholders as owners of the company. Not only would you prop up the share prices, it would actually have a positive impact on the economy.


2 Response to Japanese government considering buying stocks

December 19, 2008 at 11:45 PM

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


December 21, 2008 at 1:56 AM

we all keep on moving in the direction of China... the only real difference is the percent of companies that the government controls. It is pretty retarded.

Post a Comment