Bank of Japan to buy some bank-held stocks

Reviewed By Hitoshi URABE

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"Bank of Japan to buy some bank-held stocks "
http://straitstimes.asia1.com.sg/money/story/0,1870,144154,00.html?
by Reuters, Bloomberg News, AFP, Straits Times

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Aside from the Prime Minister's visit to Pyongyang, the news stunned those involved in economic policy or finance last week was the announcement by Bank of Japan, the central bank, to purchase stocks held by banks.

As reported in the article, the governor of the central bank, Mr Hayami explained, "The central bank must consider measures that will help banks reduce risks from their shareholdings." The announcement had an immediate effect on the stock market, and the prices soared especially of major banks who were expected to be the beneficiary of the measure.

Many praised the plan, that it would relieve the pressure off the banks to regain financial strength. It was also considered to indicate the awareness on the part of Bank of Japan of the serious economic situation in Japan. On a more immediate account, it was welcomed as it would raise stock prices toward the end of September, the fiscal half-year.

Things began to look a little off course, however, when it was revealed that the plan by the central bank had not been coordinated by the government. Mr Takenaka, the Minister of State for Economic and Fiscal Policy, immediately resented the plan, saying that it is not the job of Bank of Japan to hold stocks of private entities and that he had not been consulted on the issue.

For many of the participants in the market, Mr Takenaka's response was a disappointment. Faced with historical lows, they were craving for some measure by the authorities to raise stock prices, as has been the case in almost every fiscal end for the past decade. (These measures were often dubbed unofficially as PKO for "price keeping operation" or PLO for "price lifting operation.") As it turned out, it was not a result of a concerted policy between the government and the central bank.

As also is mentioned in the articles, such a measure to purchase stocks has never been adopted by any central bank in any developed country. It could be more natural to assume, then, such a measure by a central bank is considered improper elsewhere in the world.

There are in fact apparent problems with this plan. One is that whatever the intention of the central bank, it is in effect skewing the market by favoring certain companies over others. As the motive of the purchase by a central bank cannot be that of an investor, its selection of the stocks to purchase must be based on other criteria. If it were an act of the government, it could be an exercise of policy, intending to assist certain industry for political purposes. But such is not a responsibility of a central bank. Furthermore, in the case of government policies, which are supposed to be known publicly, market participants are able to factor in the necessary elements in price making in the market. However, a central bank intervention, as its purchasing policy is not known, would be only be jeopardizing a sound price making mechanism of the market.

Another problem is more fundamental. Purchasing stocks of an enterprise means owning that entity. Any responsible investor in a free capitalism is expected to exercises its powers to protect and increase its own investment value, resulting in voicing its opinions toward the management of the entity. Since the central bank lacks that healthy motive, it is very doubtful for Bank of Japan to function as a legitimate participant in the world of applied capitalism.

A central bank purchasing shares of private entities could imperil the market and even endanger the very basics of capitalism. But then, is Japan's economy really based on capitalism?