Bank of Japan’s Experimental Lending

The country which taught the world negative interest rate economics, is now experimenting with modern monetary policies, ETF lending being one of the most recent ones. It is a classic example of how the central bank is using the financial markets as a tool to spur financial stimulus. Typically, a central bank uses its arsenal of monetary policies to achieve its mandate, unlike the Bank of Japan(BOJ), which is expanding its umbrella of financial market intervention to break investor aversion towards these financial engineering wonders, namely Exchange Traded Fund and Real Estate Investment Trusts.

BOJ has been frantically making efforts to pull its inflation up to around 2%, but they have led to unfortunate economic spillovers in the bargain. This is its seventh consecutive year of large scale asset purchases, in the form of bonds and equities, drying up market liquidity for the private investors in the equity space. This has been taken very negatively by the global asset allocators and are now shedding Japanese equity out of their portfolios. When the central bank holds two thirds of the ETF market, the price discovery is questionable. The BOJ is stuck in an economic tailspin, between controlling the defections of the financial markets or increase monetary stimulus. Even after flushing the economy with money, it is not able to beat its deflationary trend. It seems like the transmission mechanism is not adequately able to endorse the money into production and thus not leading to increased consumption. At the end it seems like, Grand old Duke of York: Buy ETFs to lift the market and then lend it to short sellers to march it down.