TOKYO -- Auctioning off Japanese government bonds is becoming a profitable business for the finance ministry as yields move further below zero, though costs passed from buyers to the central bank could lighten the country's wallet in the long run.
Under ordinary circumstances, financial institutions would pay no more for a bond than its face value plus total interest payments -- for example, 101 yen for a 10-year, 100-yen JGB carrying a 0.1% coupon. If a buyer pays more than that, the bond's yield becomes negative, and the seller -- in this case, Japan's government -- profits from the transaction. In an auction of 10-year JGBs Tuesday, the average yield fell to a record low of minus 0.243%, netting the government around 60 billion yen ($590 million) on the roughly 2.4 trillion yen sale -- or more than 2.6 times the profit from June's offering.
Even when paying such high prices for government bonds, financial institutions have little to fear in the way of losses. The Bank of Japan is ready to pay even more on the secondary market to support its monetary easing program, under which the bank is growing JGB holdings by around 80 trillion yen each year. Market yields on newly issued 10-year JGBs hit minus 0.255% Tuesday, indicating higher prices for the BOJ and a handsome profit for those who bought the instruments at auction.
More market players have come to expect the BOJ will keep its easing program in place long-term as the global economy stalls. Financial institutions are confident that the bank will continue buying up large amounts of government debt for the time being, letting them pay ever-higher prices for JGBs at little risk.
But while negative yields hand the finance ministry a profit on bond sales, the central bank is taking large hits on its own purchases. In fiscal 2016, the BOJ is poised to pay around 10 trillion yen more for JGBs than their total face value, the Japan Center for Economic Research has calculated.
The losses on a given bond will be booked in stages over that instrument's life. Interest income will ease part of the pain, but "the BOJ's balance of payments will turn negative nonetheless," JCER President Kazumasa Iwata said.
Deteriorating finances would in turn cut the central bank's annual payments to the government. Over time, this reduction could come to outweigh the income associated with negative bond yields. As the government weighs massive outlays funded by rock-bottom interest rates, easing's unpleasant side effects, including lax fiscal discipline, appear to be growing more severe.