“”A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.””  — Ron Paul

A free market is a market economy system in which the prices for goods and services are set freely by consent between vendors and consumers, in which the laws and forces of supply and demand are free from any intervention by a government. While the stock market was a free market system, since the Great Recession, the central bankers (Fed, ECB and BoJ) have completely changed the rules of the game. With quantitative easing in the US, the Fed purchased trillions in mortgage backed securities and US Treasuries to keep rates low and to keep liquidity especially high. The Bank of Japan went even further. Since 2011, the BoJ has been buying exchange-traded funds or ETFs to push its stock market higher. While this may seem very extreme, I was shocked to find out that the Japanese central bank owns more than half of the nation's market for ETFs! That's not a typo. At the end of September, the BOJ has accumulated an ETF position of 52% of the entire ETF market!

Ready to buy it all

According to Bloomberg's latest survey, 16 of 36 economists are expecting the BoJ to boost stimulus this Friday with 12 saying it will expand its ETF-buying budget. Last October, the BoJ tripled its ETF budget and the Topix Index is up 21% since that announcement. Citigroup Global Markets Japan's Tsutomu Fujita says there's room for them to triple it again. “Buying bonds is no longer possible, but they still have plenty of scope to increase ETFs purchases to, say, 10 trillion yen from the current 3 trillion yen,” said Fujita.



If the BoJ increase its ETF-buying again, what are the implications? The BoJ is simply creating money out of thin air and pushing asset prices higher. Can it own 70% of the ETF market? What happens if it owns 100%? These are the questions that investors must ponder with a system that is no longer free. Can central bankers simply just buy everything with no repercussions? While they haven't had success in creating inflation and can't stop economic gravity, perhaps they have found a way to manipulate the financial markets higher. The end game is unclear but for now, the markets march higher.

Header photo from Unsplash Sorasak