The Bank of Japan’s assets fell for the second month in a row

It may be confusing to people in the US financial media who in recent months have injected some new quantitative easing from the Bank of Japan.

Written by Wolf Richter for WOLF STREET.

Total assets on the Bank of Japan’s balance sheet as of June 30 decreased by 3.8 trillion yen from May, the second consecutive month of declines after actually falling by 2.2 trillion yen in May compared to April. At 732.7 trillion yen, total assets are now at their lowest level since February 2022. In dollar terms, total assets have fallen by $44 billion over the past two months.

This may come as a surprise to the good folks in the American financial media and in the blogosphere, who, without looking at the BOJ’s balance sheet, have been ranting for months about the massive amounts of quantitative easing the Bank of Japan has been doing to keep the 10-year yield below pegging the yield at a rate of 0.25%.

The three main categories of assets on the BOJ balance sheet, which among them comprise 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: 49.1 trillion yen ($360 billion). They are ETFs (36.8 trillion, $270 billion), Japanese real estate investment trusts (J-REITs), corporate papers, and corporate bonds.

For a sense of proportion, these are the three categories: government securities (purple), loans (green), the combined total of ETFs, J-REITs, corporate papers, and corporate bonds (red line at the bottom).

The Bank of Japan’s “shock and awe” program of quantitative easing began under Abenomics in 2013. In 2016, the Bank of Japan established a “yield curve control,” threatening to trade unlimited amounts of Japanese Government Bonds (JGB) to maintain the 10-year yield at “About zero percent.” Markets assumed this meant a range from -0.10% to +0.10%. The upper limit has now moved to +0.25%.

In late 2020, after Prime Minister Abe left, Abenomics was pronounced dead, and the Bank of Japan began to scale back its bond purchases.

A closer look at the three asset classes of quantitative easing.

Government securities holdings On the balance sheet of the Bank of Japan it usually rises two consecutive months and then decreases during the third month as a result of large long-term bond issues that are due and off the balance sheet in one month and redeemed in the following month.

Overall, the level of government securities was zigzag down from the previous peak in February 2021. So this was the hidden quantitative tightening of the Bank of Japan (QT), which came despite an outpouring of announcements by the BoJ that it would continue easing.

In March of this year, they fell, and in April and May, they rose on schedule but by a greater amount than in previous periods. And in June, instead of lower, they went up and finished the month 0.5% higher than it was in February 2021. In other words, all the yield curve control action that was launched has been a pullback of the hidden QT since February 2021.

At the same time, the Bank of Japan trimmed some other assets, and total assets fell.

loan programs In the balance sheet of the Bank of Japan is supposed to stimulate bank lending. Instead of creating money and buying securities from banks, the Bank of Japan creates money and lends it directly to banks – free money. Taken together, these loans are the second largest asset on the Bank of Japan’s balance sheet, after government securities, and account for 19% of its total assets.

These loans continued to rise continuously until March, three times From the start of the pandemic to its peak in March, this is how the Bank of Japan conducted a large part of the quantitative easing pandemic. But in April and May, the balance fell suddenly, when the Bank of Japan ramped up its purchases of government bonds. It rose in June to 139 trillion yen, which is down by 12 trillion yen from the peak in March, back to where it was in October 2021:

ETFs, corporate bonds, commercial paper, and J-REITs It represents only 6.7% of the Bank of Japan’s total assets, although much of the hype has been centered around it in the US financial media. The Bank of Japan adjusts ETFs according to market cap, and they swing with the stock market, but overall, they haven’t gone anywhere since February 2021:

Total assets, long term: How the Bank of Japan went nuts.

You can see the decline in total assets over the past two months on this quantitative easing chart going back to 2001.

The Bank of Japan established QT for 18 months, from January 2006 through June 2007 (circled in green), during which time it reduced its assets by 36%, unwinded five years of quantitative easing, and total assets did not return to their 2005 peak until 8 years later, as they set off Abenomics:

Enjoy reading WOLF STREET and want to support it? Use ad blockers – I totally understand why – but would you like to support the site? You can donate. I appreciate it very much. Click on a mug of beer and iced tea to learn how to do it:

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

Leave a Comment

Your email address will not be published. Required fields are marked *