The stock portfolios of banks in Japan have been hurting as badly as anyone elses lately. The Bank of Japan fears that it could cause these banks to stop lending towards the end of their fiscal year (March 31st) and even beyond.
Therefore, overnight, the Bank of Japan decided to start the process of buying 1 trillion yen worth of stock from these banks. This way it will help to shore up their capital and help them to continue the lending process without being so tied to their stock market.
The central bank will purchase shares until April 2010 and will hold these shares until at least March of 2012.
This measure attempts to act as a safety net to stabilize the financial markets also. However, they said the plan wasnt primarily to boost the stock market. They are simply trying to prepare for the worst so to speak.
The hopes are that the central bank will improve the balance sheets of the banks so that it will make it easier for them to lend money to companies.
There are stipulations to this though. They wont just buy anything from any bank there. The central bank said that it would buy stocks of companies that have a credit rating of BBB- and higher. To be eligible, banks will need stockholdings exceeding 500 billion yen and a capital adequacy ratio based on international standards.
There looks to be six banks that qualify. Therefore they would buy up to 250 billion yen in stocks from these six banks.
While thats a good start and something noble heres the problem:
Japans six biggest banks hold about 11 trillion yen of shares, so this means that the central bank is picking up less than 10% of these shares. So my concern is how big of an actual impact this will have on the economy. It possibly may have a bigger advantage in the potential change in sentiment rather than in actual financial impact.
But I dont own Japanese stocks, so why do I care?
Some may say that they dont own Japanese shares so why do they care? Well, many Americans do own Toyota (TM), Sony (SNE), Honda (HMC), etc. They are even traded on the NYSE by the symbols above. However, lets say you dont own these or any ETF that tracks Japanese shares.
If the central banks purchase plan does help to spur lending which will help companies there, then the Nikkei could break to the upside which would help to ease the tensions globally and also would likely send the yen and U.S. dollar lower and boost stocks around the world just due to the change in sentiment alone.
So everyone around the world is hoping that measures like this do help. Because if you look at the Dow and the Nikkei, you will find that they track each other pretty closely over time (in their overall direction).
Upon the announcement, the yen did drop against all of the top 16 currencies of the world. If this drop in the yen were to continue it would by default help these exporters mentioned above.
Also, the yen has been the ultimate fear gauge this past year. Therefore, if the yen heads lower, as money pours out of this defensive play, it would likely go back into stocks all over the world (U.S. included).
Therefore everyone could end up enjoying the spillover effects of this if it works. My only concern is that it may be too small. I know a trillion yen sounds like a lot, but when these banks own 11 trillion yen in these shares, a 9% improvement for them isnt very much. Got a stock question for me?
Time will tell but at least one thing we can see is that central banks and governments around the world are trying to improve things. Eventually, the collective efforts of all of them will be felt. When it does, stocks will turn up once again. This is likely only months away and not years away. Therefore this is why its important to own stocks now for the long haul (all cash purchases, no margin).
Head Course Instructor