January 26, 2017 5:30 am JST
BOJ watch

Japan's central bank isn't sweating 'hidden' bond losses

Positive yields gradually heal wound from negative-rate experiment

MAKOTO NAKANISHI, Nikkei staff writer

The Bank of Japan

TOKYO -- The Bank of Japan's unrealized losses on negative-yielding government bonds have exceeded 10 trillion yen ($88.1 billion), but officials say there is nothing to fear, now that long-term interest rates are back above zero.

The central bank's negative interest rate scheme, announced in January 2016 amid worries about overseas economic deceleration, drove yields on Japanese government bonds of wide-ranging maturities below zero last year. Purchasing a negative-yielding bond means paying more than face value, implying losses down the line for buyers who hold to maturity.

For the BOJ, these essentially hidden losses totaled more than 10 trillion yen as of Friday, based on data released Tuesday on the bank's bond holdings and accounts. The bank books these losses in annual installments.

The bank naturally continues to rake in interest revenue on JGBs with positive yields. But because of the offsetting effect of the negative-rate bonds, net interest income on government securities in the April-September fiscal first half fell below the year-earlier level for the first time in four years.

A healthy balance sheet is essential for the Bank of Japan, which needs to maintain confidence in the yen. Yet BOJ officials are calm in the face of the 10 trillion yen cost of the negative interest rate policy. "There is no need for undue concern," one of them said.

On the mend

As yields plunged last year, it became apparent to many that losses could climb out of control if the BOJ kept buying up negative-yielding JGBs.

The bank responded in September, shifting the focus of its monetary easing to controlling the yield curve out of an awareness of the side effects of negative rates. The change followed an assessment of BOJ policy over the past three and a half years. After Donald Trump was elected U.S. president in November, American bond yields surged and their Japanese counterparts followed, mitigating losses further. Yields on 10-year JGBs are holding in positive territory, if only just.

If the BOJ can continue purchasing bonds at positive yields, the losses on underwater JGB holdings will taper off on their own. This is the logic keeping officials calm for now. An improving Japanese economy works in the central bank's favor: Exports, production and consumer spending are on the upswing, while a weak yen and an end to cheap oil should contribute to inflationary pressure.

Of course, risks remain. The new Trump administration's protectionism could hinder global growth and lead to market turmoil. If investors take shelter once again, yields on safe-haven JGBs could dive back into negative territory. BOJs officials have their share of anxiety but are taking these possibilities in stride: "We want to take the current tailwinds as cause for optimism," one said.

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