The Bank of Japan’s escalating presence in almost every corner of the nation’s financial markets threatens to further distort activity and complicate any future pulling back from stimulus.
The central bank’s growing pile of assets has now reached the equivalent of 137% of gross domestic product, according to a Bloomberg calculation based on official data.
In dollar terms, the tally of securities, loans and other assets is just 8% smaller than that of the Federal Reserve, even though the U.S. economy is four times bigger than Japan’s.
While economists laud the relative success of the BOJ’s measures to support businesses and the economy through the COVID-19 crisis, many of them also warn that accelerated growth in the bank’s asset mountain will be hard to scale back in the future without unnerving investors and shocking loan-dependent companies and policy makers.
With its array of corporate debt and commercial paper quickly building, the BOJ’s "whale in the pond” presence is also spreading beyond government bonds and stock funds to distort other markets and further crowd out private investors.
"It’s like the BOJ has created an intensive care unit and wheeled everybody inside. It’s so comfortable on the drip feed that no one wants to leave,” said Takahiro Sekido, chief Japan strategist at MUFG Bank Ltd.
The BOJ aggressively ramped up its lending and asset buying in March as the looming scale of the pandemic spread jitters among investors and businesses.
Given the already bloated size of the BOJ’s assets, the pace of increase appeared smaller in scale than its global peers, especially compared with the Federal Reserve. That partly reflects the Fed’s efforts to trim back earlier stimulus, something the BOJ was unable to do and will now find more difficult as its stash of sovereigns, bonds and ETFs continues to grow.
While Japanese government bonds still dominate the array of BOJ assets, at a 70% share of the total, the central bank has concentrated its buying on short-term Japanese treasury bills to help absorb the impact of higher government spending.
A jump of more than 300% in its bill purchases since the start of the year demonstrates that the BOJ’s support for government borrowing goes beyond just setting the 10-year bond yield at around zero.
In value terms, the increase in lending has been larger. The central bank has more than doubled the size of its loans through two new programs as it tries to keep companies afloat during the pandemic. The move has pushed the share of loans up to 15% of total assets, from around 8.5% at the end of last year.
That has supported a record pace of lending by private banks, but in helping push bankruptcy cases down to a 30-year low, there’s also concern that the BOJ could end up propping up firms that don’t deserve help.
The BOJ’s exposure to asset markets also continues to increase, even after it bought less aggressively as global volatility stabilized. While in September it bought exchange-traded funds at only half the pace needed to hit its heightened annual limit of ¥12 trillion, its share of the market crept up to 71%.
The BOJ is also the dominant player in the government bond market. The bank now also owns almost a fifth of commercial paper and 7% of corporate bonds.
BOJ observers are closely watching if and when the bank can lower its guidance for asset purchases to pre-crisis levels without disrupting markets.
"Japan’s financial markets are increasingly trading on the starting premise of BOJ measures. Even a tiny shrink in the safety net could shock some participants and destabilize markets,” Sekido said.