Bank of Japan assets fall for second consecutive month

Perhaps confusing to people in the US financial media who in recent months had announced a new BOJ QE.

By Wolf Richter for WOLF STREET.

The total assets of the Bank of Japan balance sheet to June 30 fell 3.8 trillion yen from May, the second consecutive month of decline after already falling 2.2 trillion yen in May from April. At 732.7 trillion yen, total assets are now the lowest since February 2022. In dollar terms, total assets have fallen by $44 billion over the past two months.

This might surprise the good folks in the US financial media and blogosphere who, without ever looking at the BOJ’s balance sheet, had been shouting for months about the huge amounts of QE the BOJ was doing to keep the 10-year yield below its peg. yield of 0.25%.

The three major categories of assets on the BOJ’s balance sheet, which alone account for 99.7% of the BOJ’s total assets, are:

  1. Japanese government securities: 542.5 trillion yen ($3.98 trillion).
  2. Loans: 139.3 trillion yen ($1.02 trillion)
  3. Corporate debt and equity securities: 49.1 trillion yen ($360 billion). These include equity ETFs (36.8 trillion yen, $270 billion), Japanese real estate investment trusts (J-REITs), corporate paper and corporate bonds.

To give an idea of ​​the proportions, these are the three categories: government securities (purple), loans (green) and the combined total of equity ETFs, J-REITs, corporate papers and corporate bonds (bottom red line).

The BOJ’s ‘shock-and-awe’ QE began under Abenomics in 2013. In 2016, the BOJ instituted ‘yield curve control’, threatening to swap unlimited amounts of Japanese government bonds (JGB) to keep the 10-year yield at “around zero percent.” Markets assumed this meant a range of -0.10% to +0.10%. The upper limit has now increased to +0.25%.

At the end of 2020, after the departure of Prime Minister Abe, Abenomics was declared dead and the BOJ began to reduce its bond purchases.

Focus on the three QE asset classes.

Holdings of public securities on the BOJ’s balance sheet normally rise two months in a row, then decline in the third month based on large long-term bond issues maturing and exiting the balance sheet in one month and replaced the following month.

Overall, the level of government securities had zigzagged lower from the previous peak in February 2021. So it was the BOJ’s stealthy quantitative tightening (QT), which came despite a stream of announcements from the BOJ that it would continue to ease.

In March of this year they declined, and in April and May they increased as expected but by a larger amount than in previous periods. And in June, instead of falling, they rose and ended the month up 0.5% from February 2021. In other words, whatever this yield curve control stock did , it is to cancel the stealth QT since February 2021.

At the same time, the BOJ reduced some other assets and total assets fell.

Loan programs on the BOJ’s balance sheet are meant to stimulate bank lending. Rather than creating money and buying securities from banks, the BOJ creates money and lends that money directly to banks – free money. Together, these loans make up the second largest asset on the BOJ’s balance sheet, after government securities, and account for 19% of its total assets.

These loans continued to climb steadily until March, triple from the beginning of the pandemic until the peak in March. This is how the BOJ has conducted much of its pandemic QE. But in April and May, the balance suddenly shrunk, as the BOJ stepped up its buying of government bonds. They rose in June, to 139 trillion yen, down 12 trillion yen from the peak in March, and back to where they were in October 2021:

ETFs of stocks, corporate bonds, commercial paper and J-REIT represent only 6.7% of the BOJ’s total assets, although much hype has been centered around them in the US financial media. The BOJ adjusts ETFs to market value, and they fluctuate with the stock market, but overall they haven’t gone anywhere since February 2021:

Total assets, long-term: how the BOJ went crazy.

You can see the decline in total assets over the past two months on this QE chart dating back to 2001.

The BOJ instituted a QT for 18 months, from January 2006 to June 2007 (circled in green), during which it reduced its assets by 36%, undoing five years of QE, and total assets did not return to peak of 2005 than 8 years later when Abenomics was launched:

Do you like to read WOLF STREET and want to support it? You use ad blockers – I completely understand why – but you want to support the site? You can donate. I greatly appreciate it. Click on the mug of beer and iced tea to find out how:

Would you like to be notified by e-mail when WOLF STREET publishes a new article? Register here.