BOJ's paper loss on bond holdings spikes tenfold
Hit to Japan central bank's assets grows to $71bn as yield cap is raised
The Bank of Japan's paper loss on Japanese government bond holdings grew more than 10 times at the end of last year from three months earlier as rises in long-term rates undercut the value of the assets. The market value of the central bank's JGB holdings stood at 554.6 trillion yen ($4.2 trillion) as of the end of December, according to preliminary flow of fund data released Friday. Given that the announced book value of the assets was 564.1 trillion yen, the unrealized loss came to 9.5 trillion yen ($71.4 billion), up from 874 billion yen at the end of September, based on a Nikkei calculation.
The BOJ announces unrealized gains and losses on JGBs at the end of March and September every year. Last September's announcement showed an unrealized loss for the first time since March 2006, when quantitative easing was lifted. The BOJ has been buying a massive amount of JGBs to guide long-term interest rates to around 0% under its yield-curve control. But facing pressure from short-sellers, the central bank lifted the cap on the 10-year yield to 0.5% from 0.25% in December. This caused a spike in long-term rates, expanding the loss on the BOJ's holdings. Gov. Haruhiko Kuroda told the lower house Budget Committee in February that the unrealized loss on the assets was about 8.8 trillion yen at the end of last year. The BOJ has an outsized presence in the government bond market. As of the end of December, its holding of long-term JGBs totaled 546.9 trillion yen on a market value basis, up 5.9% on the year. The central bank held a record high 52% of all JGBs, excluding short-term notes.
When short-term instruments are included, the BOJ's holdings account for 46.3%, significantly higher than 19.4% for insurance and pension funds, 13.8% held by overseas investors, and 12.5% by banks. Players other than the BOJ have reduced their holdings, making the BOJ virtually the only buyer of JGBs. The BOJ's accounting method assumes that government bonds are held to maturity, so even if the market prices fall its finances will not immediately deteriorate. However, if the market starts to feel uneasy about the BOJ's finances due to the expanding paper loss, "it may invite attacks from speculators, which could affect exchange and interest rates," said Tsuyoshi Ueno of the NLI Research Institute.
Financial assets held by households increased 0.4% to about 2 quadrillion yen, a record high. A breakdown shows that currency and deposits increased by 2.1% to 1.1 quadrillion yen, also a record high, accounting for 55.2% of the total. The growth rate is slowing as household spending goes up due to the reopening of the economy and rising prices. Household equity holdings fell 5.1% to 199 trillion yen, and investment trusts fell 5.6% to 86 trillion yen, weighed down by falling stock prices and rising interest rates. However, the net inflow into stocks and investment trusts, excluding the impact of price fluctuations, has been positive for eight consecutive quarters. As the value of currency and deposits dwindles due to rising prices, the shift from savings to investment is gradually spreading.
https://asia.nikkei.com/Economy/Bank-of-Japan/BOJ-s-paper-loss-on-bond-holdings-spikes-tenfold
https://tradingeconomics.com/japan/government-bond-yield