Thursday, June 27, 2013

Idio(syncra)tic Japanese Stock Market: Return of PKO (Price Keeping Operation) to Support Abe/Kuroda Agendas

Both "growth strategies" of Prime Minister Shinzo Abe and "QE from different time-space dimension" of Bank of Japan Governor Haruhiko Kuroda hinge on the Nikkei stock index to keep rising, signaling the "wealth effect" to the populace most of whom are yet to see any tangible benefit of either Abe's or Kuroda's strategies.

So, as part of "doing whatever it takes" (which even Bank of International Settlement says is so passe), PKO, or price-keeping operation, on the Nikkei index seems to have returned.

Economic journalist Takehiko Nishino wrote in Nikkei Shinbun on 6/26/2013 the following (my summary of original Japanese):

The Nikkei Index on June 21, 2013 started at -311 yen following the rout in the US stock market, with Dow Jones Industrial plunging 353 points. However, in the afternoon market, Nikkei, led by strong, intermittent buys in the futures market, reversed to positive, and ended the day up 215 yen. As it was happening, traders were puzzled by the scale and speed of the index recovery.

Rumor had it at first that those speculative buys in the futures market were from foreign investment banks, but it turned out that foreign investment banks like ABN Amro, Newedge Group, Barklays, UBS, Morgan Stanley were net sellers of the futures.

So who did the buying? Japanese investment banks, particularly Nomura Securities. The buying and selling of the futures were totally out of proportion. So what was it?

Mr. Nishino thinks it was the good old "PKO", price-keeping operation, resurrected. PKO was done in the 2000s when the Japanese stock market was going nowhere, to inject some fizz in the market and support the market. It worked like this:

Japanese investment banks and institutional investors routed their orders through foreign investment banks or through their overseas offices to make the orders look like they were from foreign investors.

After it was revealed they were not foreign investors, they were euphemistically called "foreign investors with dark eyes" (i.e. Japanese). Also, the national government directed public fund (public pensions, postal savings) to invest in the stock market to support the market. [That was one of the worst-kept secret among traders.]

[One of the PKO was done by then-Prime Minister Taro Aso, current vice prime minister and minister of finance, in October 2008 when Nikkei tanked to post-bubble low of 6994 yen. Aso directed the Japanese investment banks and public pensions to prop up the market at all cost (literally), and Nikkei ended the year at 8859.]

So, why did this PKO suddenly reappear on June 21, 2013, with Japanese investment banks buying up massive amount of Nikkei futures?

Mr. Nishino thinks there are two factors. Japanese investment banks themselves didn't want Nikkei to tank at this point, for their own sake. They want the "Abenomics" market that keeps going up no matter what. And Prime Minister Abe himself didn't want Nikkei to tank, right before the Tokyo Metropolitan Assembly election, a precursor to the Upper House election in July. So far, the rising stock market is about the only "positive" results of so-called "Abenomics", and if the stock market tanks it will be considered failure of Abe's overall policies.

So what to do? Buy Nikkei futures at all cost.

And today, Nikkei ended at 13,213, up 379 from yesterday's close. With PKO's help, I'm positive it will regain 50-day moving average (13,788) sometime next week (if not Friday). BIS be damned. For most Japanese from Prime Minister on down, the stock market is a true reflection of the economy on Main Street.


High Arka said...

So like America it hurts... :)

Anonymous said...

Yeah, they only need to keep doing this until the upper house elections, then Abe will be able to use taxpayer money to reward the banks efforts.

Anonymous said...

OT, the guardian reported that the UK gov will provide a '£10bn financial guarantee' to EDF to build Hinkley Point NPP. Since the UK is 'at the brink of blackouts'. Michael Fallon, the energy minister, insisted the substantial guarantees represented a commercial loan, not a subsidy... (subsidy for NPP construction is currently not allowed according to EU regulations).

The full article can be found here:

So much about too cheap to meter?????

Anonymous said...

If I recall correctly EDF requested the UK ratepayers to lock into a price per kwh that is HIGHER than the current market price, for the full amount of energy that the npp could output and for a ridiculous nuber of years. If this is what this "financial guarantee" is about, well, it is not a subsidy, it is a gift.

Anyone can do good business when revenues are above market and all risks are shouldered by someone else, even EDF.
Anyone can do bad business when the money is not his own, goverments are specialists in this.


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