While rumors have been circulating for some time, Japan's ruling coalition (Liberal Democratic Party (LDP) and New Komeito Party) continue to press forward on establishing a means whereby the government can intervene directly in the stock market to buy stocks. The recently announced JPY15 trillion stimulus package will be based on a fiscal 2009 supplementary budget, and ostensibly will likely include JPY50 trillion yen in government guarantees on money raised by the stock-buying entity, according to the Nikkei.
The government and coalition partners have apparently already decided to create a special committee chaired by the Prime Minister that would convene in extraordinary market circumstances, such as when the stock market's ability to smoothly price equities becomes dysfunctional. The committee, which ostensibly will include the Bank of Japan (BOJ) governor, the finance minister and other Cabinet members in charge of economic and fiscal policies, would have the power to decide if intervention is warranted. The composition of the committee would ostensibly ensure its independence and ability to resist pressure from politicians to prop up stock prices.
In addition, the LDP is also exploring the setting up of a separate entity to actually carry out the purchases, such as two organizations that were created to sop up the excess supply of stocks during the Brokerage Crisis in the 1960s.
The plan raises a number of thorny issues regarding government intervention in private enterprise, but Japan has traditionally been much less adverse to government intervention/nationalization. While not mentioned in the latest update by the Nikkei, the issue of direct government intervention into individual companies ostensibly would be solved by the government issuing guaranteed bonds to be bought by Japanese individuals, with the funds from these issues being invested in index ETFs (exchange-traded funds). Individuals ostensibly would be protected on the downside, while having an option to convert these bonds on the upside. This would also ostensibly address concerns about insider trading.
As usual, any grand stimulus plan cooked up by the LDP takes an inordinate amount of time, while details of the program are leaked to the Nikkei who dutifully publishes them as a kind of "ad ballon" to judge public reaction. Not clear is exactly how and under what circumstances these purchases would take place. Having to issue bonds to procure funds for the purchases would seem to negate the object of the exercise, i.e., prompt intervention in the stock market when panic selling threatens the very viability of some companies.
If past experience is any guide, the program may finally be rolled out just as the stock market is undergoing a recovery in discounting the end of the current historically severe recession.
