The Financial Services Authority's six-step programme to help Japan's equity market will do little to lift investors' spirits
Japanese politicians are off and running in their annual spring effort to help companies hide losses from shareholders.
Where else in the world would you find lawmakers announcing that they are considering suspending rules that require companies to report securities holdings at market value? That was reported in the Wall Street Journal on 14 March. So much better to allow companies to value their assets at the higher, not lower, end of cost or market.
Step back and think about this for a moment. What kind of signal does this send to investors when Japan encourages an open debate among elected officials on whether to give companies the freedom to cook their books? And they talk about malfeasance in US corporate governance!
Anyway, the panic attack over stock market losses on the books of banks, insurance companies, and corporations is bound to intensify as 31 March, the end of the Japanese fiscal year, approaches.
That was signalled when the Financial Services Agency released a six-step programme that it said was needed to allow the stock market to 'operate properly''.
Where would Japan be without those watchful chaps at the agency? The answer is a whole lot richer.
Among other measures, the agency is pondering requiring companies to 'consider market conditions'' before dumping large blocks of shareholdings. This is kind of funny, since if the company has decided to sell it has already considered market conditions.
That's not what the Financial Services Agency means, of course. It has some kind of half-baked idea about what it means to be a good citizen operating in the stock market. Good boys and girls do not sell when the market shows signs of weakness. By implication the patriotic thing to do when the market is weak is to buy more stocks.
Has anyone in the Japanese parliament heard about something called risk management? What kind of advice are the authorities giving out? If a company has lost a packet of money in the stock market, and if its balance sheet has been weakened as a result, why should it not consider reducing its risk to the market?
Other measures the authority is pondering would make it difficult for companies to lend shares for short sales.
When a trader sells shares short, he must borrow a certificate to deliver to the buyer. Later, if the shares have declined in price, the trader can buy back the shares at a lower price and pocket the profit.
Short selling has often been seen as an evil practice by Japanese authorities. Yet consider how telling this is. If the authorities feel compelled to restrict short selling, then they must think the market is fragile, or, worse yet, unstable.
As a general rule, never buy shares that cannot be sold short. Unusual measures to protect shareholder value should be a red flag to stay out of a particular market.
What an investor wants is to be able to buy or sell shares unimpeded by regulations at prices determined by market forces. Any other set of conditions involves risks that the government might retreat from the programme of propping up the stock market.
Another Financial Services Agency crackpot idea is to place daily limits on the size of positions in stocks that can be taken in the course of proprietary trading. Proprietary trading is a bank or other financial institution using its own capital to trade the market.
Prop traders, as they are called, can be long stock or short stock depending on their view of the market. Yet what the agency does not seem to grasp is that this activity often supplies liquidity to the market. It's hard to see how trading is adverse to a well-functioning market. Of course, none of these measures from the authority has any constructive chance of providing a long-term remedy for what ails Japan.
On the contrary, this thinking that it is OK to lie about a company's balance sheets and that the behaviour of market participants is to blame for falling stock prices, is profoundly discouraging.
What is new in Japan? Same old, same old.
Bloomberg newsroom New York
'People miscalculate how much they need'
Information request by AJ Bell
Could lose 97% of investment
'Document your conversations'