BOJ Has First Loss in Four Years on Hit From FX and Bonds

The Bank of Japan had its first loss since Haruhiko Kuroda became governor after the value of foreign currency assets fell, it wrote down bond holdings and set aside more money to cover potential future losses on its holdings of government debt.

The bank posted a net loss of 200.2 billion yen ($1.8 billion) in the six months through September, it said Monday. The yen gained about 11 percent over the period, causing 698.5 billion yen of losses in foreign currency assets. It also wrote down almost 600 billion yen of the value of its bond holdings, and transferred about 242 billion yen to a reserve fund to pay for future liabilities on its huge debt holdings.

The results show the difficulty the BOJ faces as it continues its massive monetary easing program for a fourth year. The policy of pushing down interest rates while buying up government debt has depressed its income and inflated the unrealized losses on its balance sheet, while also contributing to swings in the foreign exchange markets.

Last year, the BOJ made a 628.8 billion yen profit for the same period. Much of its income comes from interest on the bonds it owns.

“With the yen weakening recently, the BOJ may return to profit at the end of fiscal year but there will still be concerns about their easing program," said Takeshi Minami, chief economist at Norinchukin Research Institute. "They are doing this to end deflation but, without producing results, worries will mount."

The BOJ shifted policy in September to focus on interest rates, amid criticism that its previous focus on expanding the money supply through massive purchases of government debt was unsustainable and stacking up liabilities. While it is still sucking up bonds, there is now the prospect that it may begin to ease purchases.

Those purchases drive down borrowing costs to stimulate the economy, but that drop in rates also limits the income the bank can earn.

Exit concerns

Lawmakers last week grilled Kuroda by asking whether there are solid plans for exiting from those policies, which haven’t delivered the promised inflation even as they have inflated the value of the bank’s balance sheet to the equivalent of 90 percent of the size of Japan’s economy.

Kuroda replied that the bank continues to have a high level of returns from its bond holdings and that his decision last fiscal year to increase the amount of money set aside was sufficient to pay for potential losses from bond holdings.

That reserve now totals 2.9 trillion yen, with today’s addition coming on top of 450 billion yen added at the end of the last fiscal year. Even so, the bank had almost 10 trillion yen of unrealized amortization losses for those bonds on its books as of Nov. 20.

With core consumer prices far from the BOJ’s 2 percent target -- at minus 0.4 percent in October -- there is no immediate prospect of an exit for the bank from its current policies.