Monetary policy has nationalized the Japan stock market: CLSA

In a report titled, "BOJ nationalizing the stock market," Nicholas Smith, an analyst at CLSA, said that the BOJ's exchange-traded fund (ETF) buying program was distorting the market.

At its late July meeting, the BOJ said it would increase its ETF purchases so that their amount outstanding will rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously.

Those purchases were particularly distorting to the market because they focused largely on funds tracking the Nikkei 225 index, Smith said in a note dated Sunday published today via CNBC, estimating that more than half of the BOJ's ETF buying was likely in Nikkei-tied funds.

That was particularly distorting because that gauge was "a Flintstones index from an abacus age," due to its arbitrary inclusions.

Smith noted, "If it seems strange that the BOJ is hamstringing the price discovery mechanism of the Japanese stock market by partially nationalizing it, it is the entire stranger that it chooses to do so by substantially skewing its buying towards such a distorting index. The arbitrary decisions of the Nikkei committee get to choose the destination of trillions of yen of BOJ – and hence government - money."