[Asia Economy Reporter Kim Eun-byeol] The Bank of Japan (BOJ) has significantly increased its purchases of risky assets in response to the spread of the novel coronavirus infection (COVID-19), raising concerns about potential asset losses.
According to the Overseas Economic Focus released by the Bank of Korea on the 5th, the BOJ has greatly expanded its purchase limits since March this year in response to the spread of COVID-19.
The BOJ increased the purchase limits (holding balance ceilings) for commercial paper (CP) and corporate bonds from 2.2 trillion yen and 3.2 trillion yen respectively to approximately 9.5 trillion yen and 10.5 trillion yen by the end of April, about a fourfold increase. At the end of April, it also abolished the annual net increase limit of 80 trillion yen for government bond holdings. The limits for exchange-traded funds (ETF) and Japan real estate investment trusts (J-REIT) were temporarily doubled to 12 trillion yen and 180 billion yen respectively.
As a result, the monthly purchase amounts of CP and corporate bonds increased sharply. The CP holding balance expanded nearly twofold from 2.6 trillion yen at the end of March to 3.3 trillion yen at the end of April and 4.1 trillion yen at the end of May. The corporate bond holding balance increased from 3.4 trillion yen at the end of April to 3.8 trillion yen at the end of May.
The holdings of ETFs and J-REITs also rapidly increased since March this year, reaching 32.2 trillion yen and 60.3 billion yen respectively as of the end of May.
In this situation, concerns have been raised that the Bank of Japan may be exposed to credit risk and market risk, potentially resulting in losses or provisions. According to the report, the valuation gains and losses of ETFs held by the BOJ remained in the trillions of yen supported by rising stock prices until 2018, but in 2019, due to stock price declines, they dropped by 92% year-on-year to 308.1 billion yen.
The BOJ pointed out that if losses related to risky asset purchases occur and the Bank of Japan’s financial soundness deteriorates, the credibility of the yen could be undermined and the flexibility of monetary policy could be constrained. Furthermore, it added, "If the scale of risky asset purchases is reduced during the normalization phase, the impact on the market could be significant. Considering this, a cautious exit strategy should be prepared."
Meanwhile, the Bank of Korea expects the Japanese economy to gradually improve in the second half of the year but forecasts negative growth for the year as a whole. The Chinese economy is slowly recovering as production normalizes in the second quarter, and it is expected to continue its recovery in the second half of this year supported by expansionary fiscal and monetary policies.
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