Central banks buying stocks: how the Swiss and Japanese central banks came to own the American market

The claim examined on this page was that central banks were buying shares in quantities large enough to set prices, and that the American stock market’s calm through a year of political chaos was the result. In 2016 it had been a suspicion. By June 2017 it was in the portfolio disclosures.

Proof from inside

The Federal Reserve does not buy shares. What it did, by the account of one of its own former governors, was front-run the market: by promising its member banks a profit on the bonds it would buy from them, it created a flood of money it hoped would be invested in stocks, in order to create a “wealth effect” that would make Americans spend. Richard Fisher of the Dallas Fed said so on CNBC in January 2016, and his remarks are recorded on a separate page. The Fed had also begun, in 2016, to discuss buying shares directly in a future downturn, which was a way of saying it would like to do openly what it had done by proxy.

The scale

The direct buying was being done by others, and the amounts had become public. The Swiss National Bank’s filings for the first quarter of 2017 showed 80 billion dollars in American shares, up by almost a third in a single quarter; it was only the eighth-largest public investor in the world. Its equity allocation had risen from about 9 per cent of its balance sheet in 2007 to 22 per cent of a much larger one, and the purchases were concentrated in Apple, Alphabet, Facebook and their peers, the stocks that were carrying the Nasdaq to records. Switzerland’s central bank owned more publicly traded Facebook shares than Mark Zuckerberg, who held his stake in a class that does not trade. The money it used had been created to hold down the franc; the shares were where it went.

The Bank of Japan had been buying its country’s equity index funds since 2010 and by 2017 owned the majority of them, and was a top-ten shareholder in most of the Nikkei. Bank of America calculated in April that central banks had bought a trillion dollars of assets in the first four months of the year alone, mostly bonds but not only, and MarketWatch’s summary of the same research was that central-bank buying was “still the only flow that matters” to stocks and bonds. Mark Mobius of Templeton had written the previous November about the Bank of Japan as a case study in what happens when a central bank becomes the market.

Why it mattered

Forbes’s Brian Rich had described the effect: political chaos in Washington was loud and the market was not hearing it, because a buyer that prints its own money does not sell on news. Volatility sat at ten-year lows. Gold, the fear trade, did nothing. This was presented as evidence of a strong economy, and on this reading it was evidence of the opposite: the recovery the central banks had promised was failing everywhere, and their purchases were the disguise. The banks that were too big to fail were, by 2017, the central banks themselves.

The word for a buyer who corners enough of a market to move it where it wants is rigging. The consequence, set out here, was that price discovery had ended. A stock market whose prices are set by institutions that cannot lose money and never sell tells the economy nothing about the value of the companies in it, and a central bank that has become the largest holder of its country’s equities cannot let them fall without destroying its own balance sheet. That is the trap. The history of central banks buying shares, from the Hong Kong intervention of 1998 to Japan’s, showed how they got in. Nobody had yet shown how one got out.

Later note. The Swiss National Bank’s American equity holdings passed 150 billion dollars in 2021 and it recorded the largest loss in its history, 132 billion francs, in 2022 when markets fell. The Bank of Japan announced in March 2024 that it would stop buying ETFs, holding about 37 trillion yen of them, and in 2025 began the slow sale that this page said nobody had planned. The Fed has not bought shares.