Article Highlights

  • BOJ balance sheet on par with Fed, more than 90 pct of Japan GDP
  • Increase in JGB holding slows to Y71 trln, below Y80 trln target
  • Huge balance sheet to make future exit difficult
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The Bank of Japan hit a new milestone as its balance sheet topped 500 trillion yen ($4.48 trillion), roughly the same size as that of the Federal Reserve, having more than tripled since it started aggressive stimulus in 2013.

The massive size of the BOJ’s money printing, however, has barely moved it nearer to its ultimate policy goal of lifting inflation to 2 percent, highlighting the difficulty the central bank is facing as the pace of its bond buying appears unsustainable.

The BOJ’s bloated balance sheet would also complicate a future withdrawal of stimulus as any rise in bond yields sparked by expectations of monetary tightening could expose its huge bond holdings to losses, some analysts say.

Data from the BOJ showed its total assets rose to 500.8 trillion yen at the end of May, compared to 425.7 trillion yen a year earlier. It was 164.8 trillion yen when Governor Haruhiko Kuroda took the helm in March 2013.

The BOJ’s balance sheet almost matches the $4.51 trillion held by the U.S. Federal Reserve and amounts to more than 90 percent of Japan’s gross domestic product (GDP), by far the highest ratio among the world’s top four central banks.

Nonetheless, even with years of massive liquidity support and signs of labor shortages in recent months, inflation stood at 0.3 percent and is expected to remain well below 2 percent for the foreseeable future.

Slowly improving economic growth has been largely reliant on a recovery in exports and global demand, with domestic consumer spending remaining stubbornly weak.

“At the moment, the world’s economy is in pretty good shape. As long as they have that tailwind, maybe there will be some progress little by little. But if the wind stops, there’s no traction,” said Takehiro Noguchi, senior economist at Mizuho Research Institute.

“In a way, the BOJ is a like a yacht without an engine. It can advance only when there is a wind.”

Bond-Buying Limits

After three years of heavy asset buying failed to drive up inflation, the BOJ revamped its policy framework last year to one capping long-term interest rates from that targeting the pace of money printing.

BOJ chief Kuroda has repeatedly said the central bank still had plenty of bonds to buy, and that it was premature to openly debate an exit strategy from the stimulus program.

But buying large amounts of Japanese government bonds is expected to become increasingly difficult as the central bank already owns more than 42 percent of the entire JGB market.

Indeed the data also showed the pace of the increase in BOJ’s JGB has slowed considerably in recent months.

At the end of May, its holding was up 70.7 trillion yen from a year earlier, more than 10 percent below the BOJ’s official guideline of an annual increase of 80 trillion yen and the slowest pace of increase in more than two years.

Most analysts expect the BOJ to slow the pace further to around 60 trillion yen by the end of the year and to omit its pledge to increase its JGB holding by 80 trillion yen a year from its policy statement at some point.

BOJ officials say any slowdown in the bank’s bond buying won’t constitute monetary tightening as its dominance in the market allows it to cap bond yields with fewer purchases.

But removing the bond-buying pledge could face resistance from advocates of aggressive money printing in the nine-member board, including from the likes of Yutaka Harada, who stressed on Thursday the need to maintain a commitment on bond purchases.

“Maintaining the guidance is important as it instills confidence among markets” that the BOJ will keep buying bonds heavily when a negative shock hits the economy, he said.