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Economy

BOJ's balance sheet almost as big as Japanese economy

Central bank to continue extraordinary easing until deflation is beaten

Bank of Japan Governor Haruhiko Kuroda remains steadfast on the bank's 2% inflation target.

TOKYO -- The Bank of Japan's assets apparently exceeded 500 trillion yen ($4.49 trillion) as of the end of May, growing to rival the country's economy as the central bank continues its debt purchases under an ultraeasy monetary policy. 

An unparalleled situation

The bank's total assets stood at 498.15 trillion yen as of May 20. By the time the month ended Wednesday, its holdings of Japanese government bonds had increased by another 2.24 trillion yen. Assuming that the BOJ had not significantly reduced its non-JGB assets, its balance sheet almost certainly crossed over the 500 trillion yen mark into uncharted territory.

The BOJ's balance sheet began expanding at a rapid clip after Governor Haruhiko Kuroda launched unprecedented quantitative and qualitative easing in April 2013.

At around 93%, the scale of the Japanese central bank's assets in proportion to GDP has no close match. Latest data shows that the U.S. Federal Reserve held roughly $4.5 trillion in assets, which is equivalent to 23% of the country's GDP. The European Central Bank's balance sheet, at about 4.2 trillion euros ($4.71 trillion)  is larger than the BOJ's, but it still sits at around 28% of the eurozone GDP.

The BOJ in September shifted its policy focus from quantitative easing to controlling the yield curve, but the bank is still snapping up JGBs to keep long-term rates at around zero. The central bank has stood firm on its pledge to continue expanding its balance sheet to boost currency supply until Japan's consumer price inflation is steadily above 2%. This suggests that the BOJ's balance sheet will continue expanding past the 500 trillion yen mark.

A risky course

This prospect makes some financial experts uneasy. Once the inflation target is finally met, and the BOJ starts raising interest rates, the bank will have to pay more in interest to financial institutions' reserve deposits than it will earn from its low-yielding JGB holdings.

Hiroshi Fujiki, a professor at Chuo University, estimates that the BOJ will have to endure such negative yields for 10 years or longer once the 2% inflation target is reached. If the losses are large enough, the central bank could fall into a negative net worth. Some economists posit that the yen could lose its value significantly and usher in dramatic price inflation if the BOJ's liabilities exceed its assets or if the bank starts suffering losses.

Many at the central bank, however, remain sanguine. If the economy is healthy enough to raise rates, then yields on government bonds held by the BOJ, too, will rise, enabling it to pocket more than it pays in interest.

"There is only a low probability that the BOJ will fall into a negative net worth," a high-ranking official said.

Sowing seeds of trouble?

But prospects of long-term monetary easing do raise concerns about government spending. The bond market is supposed to work as a check and balance against a loss of fiscal discipline by the government.

But the market is not functioning properly since the central bank has been buying such a large volume of JGBs. The bank's own survey, released Thursday, confirms this, as an index showing trading in the JGB market has remained at low levels for some time.

Without a proper market mechanism that raises warnings about reckless government borrowing, interest rates become susceptible to sudden surges once the BOJ starts winding down its easy-money policy.

(Nikkei)

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