The Prime Minister's ruling party will discuss spending public funds on shares of Japanese banks and other companies hit by the market's sell-off
Could the Japanese government become the country's stock buyer of last resort? It's not so far-fetched: Less than a week after business leaders proposed that the government prop up Tokyo's sagging stock market, Prime Minister Taro Aso's ruling party appears to be giving the idea serious thought. On Mar. 13, Finance Minister Kaoru Yosano told reporters that the Liberal Democratic Party next week will discuss the details of a plan to spend public funds on shares owned by banks and other companies.
Yosano didn't offer any more specifics but his remarks helped catapult the benchmark Nikkei 225 stock index 5.2% higher, its biggest gain in nearly two months. Just the day before the index had slumped to close at a 26-year low.
If the government acts, it would be betting that a stock-buying scheme will help banks and companies whose finances have been eroded by the market's sell-off. Most Japanese banks and companies will be closing their books at the Mar. 31 end of the fiscal year. In some cases, banks might use the extra cash to lend out to businesses. What's more, a stock recovery might cheer up ordinary Japanese consumers who have fretted over the Tokyo market's 41% decline since last September.
Short-Lived Revival at Best
Would government buying actually revive stocks? Not for long, say experts. The market might hold steady—or even rise—for a few weeks or months. But unless the economy shows signs of rebounding, investors would likely resume selling shares, says Credit Suisse's (CS) chief strategist Shinichi Ichikawa. "Ultimately, share prices are a report card on the economy and corporate earnings," Ichikawa wrote in a Mar. 11 report. Propping up stocks "is simply falsifying the report card."
On Mar. 9, the Keidanren business lobby proposed that the government not pick specific blue chip shares. Instead the group aims to give a boost to as many stocks as possible. A government corporation could invest in exchange-traded funds (ETFs), or baskets of stocks that track market indexes.
To pay for the purchases, the government corporation would issue guaranteed bonds that can be converted into the ETFs later. The attraction of issuing so-called ETF-convertible bonds is that they wouldn't require regular interest payments. Investors, meanwhile, would have the option of receiving a payment at maturity or forgoing the payment and swapping the bond for an ETF. The hope is that it might convince more ordinary Japanese—who own just 22% of stocks in Japan—to invest in the stock market.
Deterring Global Investors
Some worry that too much government involvement could hurt Tokyo's status as a financial center, scaring off global investors. Non-Japanese investors had been a growing force on Tokyo's bourse until late last year. "Being branded as a government-driven market would threaten the Tokyo Stock Exchange's standing in the financial world in the medium to long term," the Nikkei financial daily said in an editorial this week.
The government would get more bang for its yen if it were to combine stock-buying with a dramatic increase in stimulus spending, says Waseda University finance professor Jun Uno. So far, Parliament has approved two stimulus packages totaling $66 billion, including $20 billion of cash payments to individuals. The government and central bank have set aside another $330 billion of public funds for shoring up banks' capital. But Uno says those measures are far from sufficient and suggests yet more stimulus.
He may get it. On Mar. 13, Prime Minister Aso called for a third package of public spending and tax cuts, warning lawmakers that inaction could bring more economic misery. That message was reinforced by revised gross domestic product figures released the previous day confirming that Japan's economy shrank at an annualized rate of 12.1% in the October-December quarter. Many economists expect this quarter to be no different. "Ideally, the stock-buying plan lifts the market and shrinks companies' securities losses," says Waseda's Uno. "That will buy the government time to work on longer-term policies that restore normalcy to the market. But I'm skeptical that things will go that smoothly."