The Topix closing below 1,500 two sessions on the trot. The yen in the ¥107 zone, strengthening against the US dollar. Ten-year government bond yields reaching a three-year low. It can mean only one thing: the Bank of Japan’s thrilling daily game of Deal or No Deal is back for a new season.

Most of the time, the house (sort of) wins; yesterday, it may have blundered. So how should investors play this time round?

The game is played with exchange traded funds, the asset of choice for the central bank’s intervention in equity markets. After eight years of ETF buying, the BoJ now owns a little over 5 per cent of the total market capitalisation of the Tokyo Stock Exchange. It has yet to make any official change to its stated target of ¥6tn ($55bn) of annual ETF purchases, which it actually exceeded by ¥500bn last year.

A small part of the BoJ’s programme — the one designed to “support investment in physical and human capital” — buys specially selected ETFs at a modest but dependable rate of ¥1.2bn every session. The excitement, however, arises from the BoJ’s sporadic splurges on ETFs at the rate of just over ¥70bn per session. These habitually occur in the afternoons of days where the market fell heavily in the morning.

There have been quite a few interventions of late: the yen is rising, uncertainty is high and the US-China situation looks precarious. The BoJ discharged its big ETF-buying guns on 10 of the 19 sessions in May, for example, having intervened just 18 times between the start of January and the end of April.

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On Tuesday, the BoJ completed its fifth straight session of big ETF buying, marking the longest stretch since October. Note that when things are rough, as they are now, the BoJ’s actions only slow — rather than reverse — a rout.

On each of the five days, the pattern was the same: down in the morning, up in the afternoon as the market “senses” that the BoJ is coming in. So will it do so for a sixth session if Wednesday morning is horrible?

On the evidence of Tuesday, it should not, but it might. The market rose immediately after the lunch break, according to the head of trading at one bank, because of the market’s “knowing” the BoJ would be supporting. Nobody actually “knew” that the BoJ had indeed bought ¥70.5bn of ETFs until the formal announcement three hours after the closing bell. Under tense conditions such as these, the BoJ did not in fact need to buy anything to bring the market back in the afternoon.

There is a strong argument that the bank should at least experiment with refraining from buying at times like this. Not just to keep things interesting, but to sharpen the effect of the real thing — when it is really needed.



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