BOJ's Record High Government Bond Purchases
Holding Ratio Exceeds Half as of September
Government Bond Amount Expected to Increase by 42 Trillion Won in 3 Years
Bank of Japan (BOJ)
[Asia Economy Reporter Lee Ji-eun] Last month, as Japanese government bond yields surged sharply, the Bank of Japan (BOJ) reportedly undertook the largest-ever scale of government bond purchases to defend interest rates. Market expectations that Japan's monetary policy would shift to a tightening stance have intensified, leading to analyses that the BOJ's government bond purchase volume is excessively expanding.
According to Nihon Keizai on the 1st, the BOJ purchased government bonds worth 23.6902 trillion yen (223.7847 trillion won) in January. This far exceeds the previous record purchase amount of 16.2038 trillion yen in June last year.
The reason the BOJ engaged in massive government bond purchases is that Japan's 10-year long-term government bond yield rebounded to nearly 0.5%, the allowable fluctuation range for long-term interest rates. Previously, in December, the BOJ partially revised its monetary policy by raising the allowable fluctuation range for long-term interest rates from ±0.25% to ±0.5%. The market interpreted this as a signal of a shift to a tightening stance, leading to massive selling of Japanese government bonds and a sharp rise in bond yields. On the previous day, Japan's 10-year government bond yield closed at 0.484%, about 1.9 times higher than 0.256% on December 19 last year, before the monetary policy revision was announced. On the same day, 8-year and 9-year yields, which are not directly managed by the BOJ, recorded 0.512% and 0.514%, respectively, surpassing the 0.5% allowable fluctuation range for long-term interest rates.
As the BOJ pulled out the card of large-scale government bond purchases, concerns have arisen in the market. Excessive government bond purchases by the central bank lead to fiscal burdens for the authorities. As of September last year, the government bonds held by the BOJ already exceeded half of the total outstanding issuance. The Japanese Ministry of Finance estimated that, anticipating a rise in long-term interest rates, the 'debt service ratio'?the principal and interest payments on government bonds?will increase by about 4.5 trillion yen (42.489 trillion won) in three years.
Manaka Nakazora, Vice President of BNP Paribas Securities' Global Markets Division, told Nihon Keizai, "For financial tightening policies to be accompanied, the central bank inevitably has to purchase government bonds," but expressed concern that "if the central bank holds most of the issued government bonds, it could adversely affect the recovery of market functions."
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