The Bank of Japan’s massive asset purchase program has taken it into uncharted territory, with its ballooning holdings now larger than the country’s annual economic output.
Its holding reached a staggering ¥553.6 trillion ($4.9 trillion), figures released Tuesday show, compared with nominal gross domestic product of ¥552.8 trillion at the end of June.
To put the milestone into perspective, the Federal Reserve’s assets are about 20 percent of U.S. GDP, while the European Central Bank’s holdings are equal to about 40 percent of the eurozone economy. And while the BOJ has significantly reduced the amount of Japanese government bonds it buys, its hoard of JGBs is still expanding.
With inflation at half the 2 percent level targeted by both the BOJ and the government of Prime Minister Shinzo Abe, asset purchases are set to continue for the foreseeable future, even if the pace of growth slows. A sales tax hike planned for October next year, followed by an easing in demand as the building boom for the 2020 Tokyo Olympics winds down, likely mean continued pressure on the central bank to keep priming the economy.
“There’s no consensus theory on how big a central bank’s holdings can get before it starts getting dangerous,” said Nobuyasu Atago, chief economist at Okasan Securities Co. and a former BOJ official. “There’s a vague sense of unease when the holdings keep getting larger, but it’s unclear at what level things should stop.”
The central bank held ¥456 trillion in JGBs as of Nov. 10, up from ¥125 trillion when Gov. Haruhiko Kuroda launched his first round of extreme easing in April 2013. It held 42.3 percent of outstanding of Japanese government bonds and treasury bills as of the end of June.
“The BOJ has to continue its solo journey of enlarging the balance sheet to keep interest rates low,” said Masamichi Adachi, an economist at JPMorgan Chase & Co. and a former BOJ official. Compared with the U.S. and Europe, Japan has a lot more work to do to spur inflation, and monetary policy alone isn’t enough, according to Adachi.
The sheer amount of bonds it has already accumulated means that it must keep buying more just to cover those that mature. The amount of bonds maturing is now running at an annualized pace of close to ¥50 trillion, according to Bloomberg Economics’ Yuki Masujima.
“We don’t anticipate any disasters, but as the BOJ takes monetary policy deeper into uncharted territory, it’s likely to face more challenges,” said Masujima.
The BOJ has wrought havoc in the bond market, where both the volume and volatility of trading have dropped sharply. The market’s price and risk discovery functions have been severely impaired, and ultra-low interest rates are crushing the profit margins commercial banks make by lending money. While shifts in policy in July have revived some movement in the bond market, structural issues remain.
Further down the road, there’s the huge issue of what happens when the BOJ starts clearly heading toward the exit. One former official has argued that the central bank is headed toward a “semipermanent” state of balance sheet losses once it moves toward an exit from its crisis-era policies.
The BOJ had ¥3.6 trillion set aside as of the end of March to provide for “possible losses on bond transactions,” according to the budget and accounting division. The latest data as of September will be released later this month.
“They’ve already started to put money aside,” said Harumi Taguchi, principal economist at IHS Global Insight Inc. in Tokyo. “In terms of a limit to how much they can hold, I think the BOJ is really approaching its upper limit. The amount of JGBs that are being newly issued is falling, and I don’t feel the BOJ will keep buying at the same pace even when they own the majority of the market.”