Like craft beer, e-cigarettes, or the Keto diet, Japan's financial district loves a good fad. And the favourites in 2018 is the belief the Bank of Japan is engaged in stealth tapering.
The stealth designation is in the eye of the beholder, but evidence for the taper seems more empirical. The currency jolting January 9th announcement that the central bank would trim purchases of long dated JGBs was unarguably a pullback, and the past few months have provided BOJ watchers with other signs interpretable as a change of thinking.
But the JGB purchase trim came with a lot of technical context, not least being that after nearly five years of Kuroda-nomics, and its 80 trillion yen annual JGB purchases, the BOJ has cornered 40% of the market and does not have infinite room left to carry on gobbling.
Given those realities, a truer sense of whether the BOJ is genuinely tapering should be visible in its commitment to about 6 trillion yen annual buying of exchange traded funds-- ETFs-- a programme that currently leaves the BOJ holding just over 3% of the market cap of Tokyo listed stocks, and therefore no technical impediment to pressing on. Some, including JP Morgan economists, are convinced that the ETF buying is in line for a pullback, and may be cut to an annual 3 trillion yen pace in September. Equities strategist Deutsche Bank have begun trying to assess how hard such an announcement would hit the topics index.
Even as the BOJ ended 2017 as the largest net buyer of Japanese stocks, the ETF programme has over the past year produced a number of stints where it has looked as if the BOJ were easing off. The central bank has tended, not unreasonably, to target its buying in the afternoons of days where the topics has fallen in the morning session. In a year where the topics climbed 24% to a 26 year high, there were fewer such days on which to buy.
But there is still no evidence of a taper. As CLSA strategist Nicholas Smith points out, on a 30 day annualised basis, the BOJ is currently buying ETFs at an 8.1 trillion a year pace. On a year-to-date basis, its current pace analyses at just 4% below the stated target of about 6 trillion yen. If there really is a taper, it's still too stealthy to see.