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BOJ’s Holding of Government Bonds to Exceed Banknotes This Year

The Bank of Japan’s holdings of government bonds are likely to exceed banknotes this year, an indication of the central bank’s growing stake in the world’s largest public debt market.

The amount of government bonds held by the Bank of Japan may reach about 92 trillion yen ($1.2 trillion) by December, more than the estimated 83 trillion yen in banknotes in circulation, according to a central bank report released yesterday. The total includes purchases made under the bank’s asset-purchase program as well as its monthly bond buys.

Pledged purchases of government debt under the BOJ’s asset-purchase program have swelled to 29 trillion yen from the 1.5 trillion yen when the facility was unveiled in 2010, prompting Governor Masaaki Shirakawa to reiterate last month that the increased commitment isn’t intended to finance fiscal spending. The BOJ has expanded government bond buys twice this year under the fund, its main policy tool.

“There is growing concern that we may be seeing the beginning of monetization,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “Cautious comments by BOJ members reflect that they know they’re doing something undesirable.”

The central bank buys 1.8 trillion yen of bonds a month. The BOJ has a self-imposed rule that forbids those purchases from exceeding banknotes in circulation. Buys made through the asset-purchase fund are exempt from that cap.

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