- Gap between book value of JGBs and face value at a record
- BOJ wrote down 874 billion yen in losses last fiscal year
While not an immediate problem because the BOJ’s income can cover the losses, the widening gap raises questions about the sustainability of the central bank’s bond purchases, which Governor Haruhiko Kuroda has said could be expanded.
The costs of the central bank’s record stimulus are mounting, while its chief goal -- spurring inflation to 2 percent -- appears as far away as it was when Kuroda took the helm in 2013. The BOJ is in the midst of reviewing its policy before a board meeting later this month, but the governor has said there will be no scaling back of his monetary program.
“These numbers show the distortions of the BOJ’s current policies,” said Sayuri Kawamura, a senior economist at the Japan Research Institute in Tokyo. “The annual amortization losses are going to increase and consume the BOJ’s profits, and the risk is increasing that the bank’s financial stability will be shaken.”
The bonds the BOJ owns are worth almost 326.7 trillion yen when taken at face value, but were marked at almost 335.4 trillion yen on the balance sheet in August. That gap is 42 percent bigger than before the introduction of negative rates in January, according to an analysis of the balance sheet and list of the bonds the central bank owns.
Tadaaki Kumagai, a spokesman for the central bank, said “the BOJ releases half-yearly and yearly accounts,” while declining to comment further.
The gap exists because, unlike the Federal Reserve, the BOJ counts its bond holdings at the purchase price, minus amortization costs. This number is diverging more from the face value because the central bank’s purchases and negative rate policy are pushing up prices. The face value is what the BOJ will receive when the bonds mature.
At the end of the 2015 fiscal year on March 31, the gap between the two valuations was 6.4 trillion yen and the BOJ wrote down 874 billion yen, according to documents seen by Bloomberg. That was covered by the 1.29 trillion yen in coupon income the bank received that year, a situation that may not continue indefinitely.
With the gap between the two valuations even larger now, it “would probably be a pretty safe bet” that the losses the BOJ will book for this fiscal year will increase from 2015, according to Naomi Fink, the chief executive officer of Europacifica Consulting.
While when those losses may exceed its income is unknown, with the bank buying more high-price, low-income bonds, that time will probably come soon.
Fink said that under some scenarios, this could even happen this fiscal year.
The BOJ currently has 2.69 trillion yen in a reserve to draw on to pay for bond losses.
“In preparation for an eventual exit from stimulus, the BOJ last year started adding to its reserves to guard against bond losses, but if profits decline, there’s a chance that they won’t be able to continue that,” Japan Research Institute’s Kawamura said. “It’s a pretty dangerous situation now, even before they start to exit.”