Japan Mulling Ways To Make Stock Market Stop Crashing


Japan is considering ways to stop its stock market from dropping (it’s almost at a 26 year low).  When stock markets drop, countries always consider ways to stop their stock their stock markets from dropping–usually by buying stocks themselves.  Most end up trying this.

And it never works.

Because it’s the marginal buyer that determines the price of stocks, and the government can’t be that marginal buyer at an artificially high level for ever or it would run out of money.  What government intervention does is temporarily slow the market’s fall, in part by getting people excited by the idea that the goverment is going to stop the fall.  Then, when the fall resumes, the government loses whatever money it invested and then some. 

The same is presumably true for housing market intervention (although we aren’t aware of an instance in which it has been implemented on a large scale.)

But by all means, Japan, go for it. 

FT: The Japanese government is considering ways to prop up the ailing stock market, as tumbling share prices threaten to erode further Japanese banks’ capital and damage their ability to lend to cash-strapped businesses.

Kaoru Yosano, who currently occupies the three key posts of finance minister, financial services minister and economics minister, on Tuesday said he had instructed government staff to look into measures to counter falling stock prices.

“It is undesirable for share prices to fall, causing unnecessary consequences. I discussed with government staff last Friday what we could do generally to deal with [falling] share prices. We must consider this, keeping an eye on market moves,” he said…

Fujio Mitarai, chairman of the influential Keidanren business lobby, on Monday called on the government to set up a public body to buy shares in the market.

After expressing appreciation for the government and Bank of Japan’s measures to assist companies to meet their borrowing needs, Mr Mitarai said: “In addition, if it is possible to support stock prices using public funds, we can expect a strengthening of the financial health of financial institutions and an increase in lending.”

Japanese banks, which hold a high level of stocks as capital, have suffered from the sharp plunge in share prices.

By the way, did you catch that?  Japanese banks hold a high level of stocks as “capital.”  You’d think after 26 years, they might have learned that this wasn’t such a hot idea.  But in any event, falling stock prices beget the need for more capital (sound familiar?)