By Goh Eng Yeow
Markets Correspondent
engyeow1@sph.com.sg

 

 Like other market watchers, I spend a lot of time trying to track the flow of money in and out of regional markets.

This beats all the interviews which the media try to squeeze out of fund managers and sophisticated investors on what they plan to do, since the trail of money does not lie.

So last week as the Nikkei-225 Index plunged a dizzying 10.55 per cent on Tuesday, and then recovered part of its losses the next day, it had me wondering about what really happened.

The standard explanation you get from any dealer is that it was a dead cat bounce, prompted by hedge funds buying back stocks to cover back the “short positions” the previous day.

But if this is the case, then how do you explain that even before Tokyo opened for trading on Wednesday, the iShares MSCI Japan fund – the most widely traded fund on Japanese stocks in New York – had already regained much of its earlier losses.

It took a few days for the mystery to be unravelled.

As the Tokyo market was experiencing its wild roller-coaster, it turned out that there was massive buying of the iShares MSCI Japan fund in New York – to the tune of almost US$1 billion in the week to last Wednesday.

Some analysts have reckoned that the Bank of Japan was behind much of the buying.

Come to think of it, that shouldn’t come as a surprise.

The mighty BOJ had injected a massive 38 trillion yen ($622 billion) into the financial system to keep Japanese banks and insurers running. It had also intervened in the currency market to stop the Japanese yen from rising sharply and escalate the already serious problems faced by the depressed Japanese economy due to the earthquake.

And why should it stop there? The equities market needed to be stabilised too, since the Nikkei-225 is one of the most widely watched indexes in the financial world – a bearer of good or bad tidings, so to speak.

So, it is not surprising if the BOJ did venture into New York to buy up the iShhares MSCI Japan fund.

Flushing the fund with cash will, in turn, trigger it to buy up more shares of the component stocks which make up the MSCI Japan Index and this will, in turn, lend support to the Nikkei-225.

This is because the Nikkei-225 and MSCI Japan share many stocks in common.

Tottering Tokyo

And as I had pointed out in my previous blog, efforts to support the tottering Tokyo market have another beneficial effect.

Just the top three Japanese banks hold US$1 trillion worth of Tokyo stocks. As such, any calamitous drop in these equities will seriously erode the capital base of these Japanese lenders and restrict their ability to lend. This would be equivalent to pulling the umbrella on a rainy day when it is needed most.

As I write, the Nikkei-225 is up 2.94 per cent, as Tokyo reopens for trading after a public holiday yesterday.

But I am not comfortable with the suggestion tossed by some analysts that the BOJ is printing Japanese yen to buy foreign assets.

When the United States central bank printed US$1.75 billion in fresh dollars in 2009 and another US$600 billion last year to try to put the troubled US economy back on the road to health in what is known as Quantitative Easing One and Quantitative Easing Two programmes, the money was used to buy US government bonds and other US assets. In other words, the money was spent inside the United States.

But analysts are raising the possibility that the BOJ should print money to buy up other countries' assets. Now, if that is the case, it is very different from the approach adopted by the US Fed. I don't believe that the BOJ should take this approach as it will not go down well with the rest of the world.

The earthquake and tsunami that had devastated much of northeast Japan is a truly horrendous human disaster. It will also be difficult to quantify the impact of the crisis brewing at the stricken nuclear plant near Tokyo.

But there will be even more chaos if printing money is seen to be the solution to all economic and financial ills. Just imagine what will happen if other countries resort to similar tactics ?

It may well spark off another round of international competitive devaluation which will be detrimental to us all.