BOJ's Latest Monetary Policy Triggers JPY13T in Losses

The Bank of Japan (BOJ) has recently experienced significant financial losses due to its shift in monetary policy. In the first half of the fiscal year, the central bank incurred a record 13.66 trillion yen in valuation losses on its government bond holdings. This is primarily attributed to the rise in bond yields, a consequence of the BOJ's decision to raise interest rates.

Historically, central banks tend to face declining bond values when they implement rate hikes, as it leads to a decrease in bond prices. The BOJ's substantial holdings of long-term government bonds, which have now decreased for the first time in 16 years, have contributed to these losses.

While the BOJ's ETF holdings generated paper profits, they were lower than in the previous period. The central bank's decision to abandon its ultra-loose monetary policy, including negative interest rates and ETF purchases, has marked a significant departure from its decade-long stimulus program.

The BOJ's recent actions, such as raising short-term interest rates and tapering its bond-buying, aim to normalize its monetary policy and reduce its bloated balance sheet. However, these measures have resulted in increased interest payments on excess reserves held by financial institutions.

Despite these challenges, the BOJ's dividend income from its ETF holdings has partially offset the losses incurred. The central bank remains committed to its gradual policy normalization while closely monitoring the impact on the economy and financial markets.