Analysts Speculate BOJ Policy Reforms to be Counter-Productive

Deutsche Bank analysts warn that Japan's government is involved in a large $20 trillion "carry trade" by borrowing low-cost yen to fund loans and foreign assets, which could pose unexpected risks if the central bank tightens policy. Based on research by the San Francisco Federal Reserve and International Monetary Fund, Deutsche's head of currency research, George Saravelos, conducted an analysis of the combined balance sheet of the Japanese government, which includes the government-run pension fund GPIF, the Bank of Japan (BOJ), and state-owned banks. This analysis revealed the asset-liability mix of Japan's $20 trillion debt.

Deutsche Bank discovered a significant overseas investment financed by low-rate, short-term yen borrowing and yielding high-interest rates, resulting in a considerable debt. As the Bank of Japan faces increasing pressure to end its extremely loose monetary policy, a report from Deutsche Bank highlights the importance of comprehending the potential impacts of this major shift, not just on the government's financial position but also on the savings and assets of individual households.

Due to Japan's low-interest rates, the yen has long been a popular choice for funding carry trades. Market participants anticipate that global investors will unwind billions of dollars worth of these trades once the BOJ exits its ultra-easy monetary policy. The Deutsche Bank report expands the scenario to encompass the Japanese government and its balance sheet.

The government has been able to maintain low real interest rates thanks to the central bank's negative rates policy. This has allowed them to create fiscal flexibility, allowing them to increase public debt to over 200 percent of GDP while financing a third of it with overnight cash, according to the report.