The Federal Reserve has been on the forefront of the trouble to stabilize capital markets amid the unprecedented disruption created by the novel coronavirus (Covid-19). With its standard financial coverage instruments (principally rate of interest cuts) largely exhausted, the central financial institution has needed to innovate on the fly. Throwing warning to the wind, the Fed has promised to supply basically infinite liquidity. It has additionally intervened within the company bond marketplace for the primary time in its historical past. Sidestepping the authorized limitations of its mandate, the Fed – with an help from BlackRock Inc. (BLK) – has financed the Treasury’s buy of bond ETFs.Now the Fed is considering even greater, overtly contemplating the potential of conducting comparable interventions within the inventory market. Whereas that is unknown territory for the American central financial institution, it’s well-trod territory for others. The Financial institution of Japan (BOJ), specifically, has been a pioneer of central financial institution inventory shopping for. Its expertise can supply vital classes, each to Fed officers and the investing public.Typical financial coverage insufficientAfter declining about 50% from its valuation set in December 1989, Japan’s asset worth bubble lastly burst in 1992, throwing the home economic system into disarray. Japan suffered by way of a “misplaced decade” that left many Japanese residents, employees and traders completely scarred.As the federal government grappled with what was to change into a protracted financial downturn, the BOJ was pressured to take an ever increasing position. Certainly, by the late 1990s, the central financial institution had taken heart stage within the struggle on Japan’s nice financial enemy: deflation. Regardless of the BOJ’s greatest efforts and aggressive deployment of standard financial coverage instruments, deflation’s cussed grip on the Japanese economic system couldn’t be damaged. By late 2002, the BOJ’s orthodox coverage arsenal was basically exhausted. The central financial institution determined it was time to discover new and uncharted coverage waters. Deploying new coverage weaponsAt the urging of the nationwide authorities, the BOJ made a historic transfer: It began shopping for fairness ETFs. This main central banking innovation, and its subsequent use for almost a decade, has cemented the BOJ’s repute as a trailblazer, as Bloomberg noticed on April 5:”Japan is to central banking what the previous Bell Labs was to the worldwide tech business: a hotbed of concepts that get tailored by others. Going again to the late 1990s, it was pressured to pioneer unorthodox strategies to attempt to spur development and restart the economic system’s credit score machine. In doing so, it is proven different central banks that they’ve a broad array of choices after they’ve already reduce rates of interest to zero.” The BOJ’s struggle on deflation has made it a real innovator amongst central banks. It has developed and deployed an array of novel coverage instruments in its efforts to battle deflationary pressures. However their outcomes have been blended.Mission not accomplishedThe BOJ maintained its inventory shopping for actions all through the lengthy post-Nice Recession financial growth. It performed a major position in propelling shares ever upward, contributing to the longevity of what would change into the longest bull market in historical past. By April 2019, Japan’s central financial institution was a high ten shareholder of greater than 50% of publicly traded firms. Even so, the BOJ’s efforts have nonetheless failed to realize all of its targets.Though it has poured cash into the market, the Nikkei index did not rise towards the all-time highs set in 1989. Furthermore, deflationary pressures have continued to plague the economic system.Whereas the BOJ’s inventory shopping for has undoubtedly helped to buoy the Japanese inventory market, it has fallen in need of its aim of defeating deflation for good, and has failed to revive the complete confidence in public markets that was misplaced within the chaotic 1990s.A brand new enemy on the gatesThe BOJ has been pressured to deal with one other financial foe in current months within the type of Covid-19. As world inventory markets started to plummet final month, the BOJ opted to step up its inventory shopping for efforts. On March 16, BOJ Governor Haruhiko Kuroda introduced that the central financial institution would double the tempo of its fairness purchases to $113 billion per 12 months. The announcement helped to stabilize market sentiment considerably, however shares have did not recuperate utterly – unsurprising given the digital shutdown of a lot of the worldwide economic system.Story continuesThe BOJ has paid a excessive worth for its fairness market interventions. On March 24, the BOJ acknowledged the impression of the market rout on its huge inventory ETF holdings. The BOJ cited a whopping unrealized lack of $18 billion to $27 billion, elevating the prospect that it’d truly put up a loss for the 12 months – a quite uncommon state of affairs for the central financial institution of a developed nation, by any measure.The BOJ has not posted an annual loss in 4 many years, however its huge, and nonetheless rising, publicity to the inventory market will solely serve to make such occurrences extra frequent. Whereas bull markets might pad its steadiness sheet, any important downturn is liable to place a critical dent within the central financial institution’s monetary statements.VerdictAs the Fed mulls its choices for added coverage interventions, it ought to think about the teachings of the BOJ fastidiously earlier than taking an identical plunge. ETF purchases can juice up shares, however they’re removed from an ideal instrument, because the BOJ has realized to its price amidst the current selloff. Furthermore, any effort to unwind such a coverage would virtually actually roil markets.Whereas the prospect of propping up fairness markets by way of direct intervention could also be interesting to Fed officers, they might be sensible, in my estimation, to err on the facet of warning. It appears most prudent to maintain that individual genie in its bottle, no matter its potential short-term utility.Disclosure: No positions.Learn extra right here:Not a Premium Member of GuruFocus? Join a free 7-day trial right here.This text first appeared on GuruFocus.