Flash rally in Bank of Japan shares leaves brokers perplexed

Shares in the Bank of Japan surged on Thursday for a fourth consecutive session, putting them more than 90 per cent up for the week and leaving brokers struggling to explain the rally.

The bull run is all the more remarkable given that the stock is notoriously illiquid, offers no dividend, is worth less than a tenth of its peak value and is synonymous with a two decades-long failure to combat falling prices.

In its new role as Japan’s least likely “meme stock”, the BoJ has risen by a total of 93 per cent from the close at the end of last week. Despite numerous theories, nobody, say veteran traders, can be quite sure who is doing the buying.

Some brokers have suggested that the BoJ’s shares have become an unexpected bellwether of what Oki Matsumoto, chief executive of the brokerage Monex, described as a “negative bubble” in cash — referring to the flood of asset purchases by central banks around the world since the Covid-19 crisis began that has fed investor appetite for any asset deemed in tight supply. 

But that is just one of a range of theories. Another centres on the idea that some investors are giving the BoJ stock a higher valuation because recent gains in Japanese stocks have generated huge unrealised profits on the bank’s policy-swollen portfolio of exchange traded funds.

Some have even suggested that BoJ shares purchased in 2021 might represent a macabre keepsake by which to remember the era of negative interest rates, yield curve control and other unorthodox policies introduced by the central bank. 

The central bank has been listed on the Jasdaq market for small companies since 2004 but first became a publicly traded company in 1949. The stock is 55 per cent held by the government, cannot be traded on an electronic exchange and provides retail shareholders with no voting rights. 

The most recent 15 per cent gain on Thursday — on a trading volume of just 11,600 shares — propelled BoJ shares to their highest level since 2015.

It is just the latest wild swing in a stock that has a history of eye-catching volatility and long-term value destruction. Owners of the stock since its most recent surge in mid-2007 have lost almost 70 per cent. Those that bought the BoJ on the over-the-counter market at its peak in 1988 have seen their paper loss spiral to more than 90 per cent.

In a note to clients this week, the veteran Japan equities analyst Pelham Smithers said that the experience of BoJ shares in the 1980s had provided a useful warning of the meme stock concept. For those that got in and out early, there was a chance of some profit. But liquidity — as with many modern-day hot stocks such as US retailer GameStop — is the challenge.

“If you didn’t get out in time, then you had a problem: there was absolutely no reason for anyone else to buy the shares. There’s no dividend and no chance of a takeover, so no income stream and no exit. Owning shares in Bank of Japan was like owning a zero-coupon perpetual bond,” wrote Smithers. 

Making a small amount of money on BoJ shares might be possible, said Smithers, “but to make a lot of money in them is both difficult and, based on past evidence, fraught with risk of a large and lengthy loss”.