Bank of Japan may have been saddled with 600 billion yen losses

As a widening gap between domestic and overseas monetary policy pushed yields higher and prices lower, the Bank of Japan may have been saddled with 600 billion yen $4.4 billion in unrealized losses on its Japanese government bond holdings earlier this month.

At Nikkei's request, Nomura Securities, Mizuho Securities and Mitsubishi UFJ Morgan Stanley Securities estimated the state of the central bank's JGB portfolio on June 15, before its most recent policy board meeting, where it decided to maintain its ultraloose policy.

More than half of the Japanese government bonds are owned by the BOJ, a buying spree to defend its yield target against rising rates abroad, leaving its finances more exposed than ever to swings in the bond market. The Japanese government, which relys on the BOJ indirectly underwriting its spending with massive debt purchases, could be in trouble as a result of this.

Mitsubishi UFJ calculated the bank's paper losses on its JGB holdings at 600 billion yen, while Nomura pegged them at 200 billion yen, due to the yields on 20 and 30 year bonds climbing as much as 0.3 percentage point from the end of March. Since a decline in yields in the second half of the month, those losses are likely to have been erased.

Mizuho's math shows that the central bank has 1.3 trillion yen in unrealized gains as of the 15th, less than a third of the total at the end of March. The brokerage estimates that if 10 year yields reach 0.65%, paper losses on JGBs will exceed the bank's capital base, which came to 10.9 trillion yen at the end of March.

It's possible that it will fall into negative net worth, according to Mizuho bond strategist Noriatsu Tanji.

Asked about the figures, the BOJ said it has not published information on its unrealized gains as of this month.

While all of the outside estimates are based on the bonds' market value, the bank's own calculations use their book value. There's no effect on its finances, according to a central bank insider.

If market players perceive a loss of confidence in its financial health, there may be further repercussions for interest rates and currency markets, where the yen has been plumbing two-decade-plus lows.

Weakening finances would affect the BOJ's ability to keep up with the massive purchases of government debt that have underpinned its easing program. As rising interest rates overseas drive up domestic bond yields, the bank has been ramping up its efforts to tamp them down, expanding its fixed-rate purchase operations along with regular and unscheduled bond buys.

They have left it with huge amounts of government debt purchased at extremely low interest rates, and therefore high prices. The yield on the BOJ's portfolio fell to 0.169% in fiscal 2021 from 0.242% in fiscal 2019. The bank is expected to hang onto its holdings for the time being, but its finances could suffer if rates increase and prices fall substantially.

Yield spread is a potential risk. When the BOJ buys bonds from banks, the money is put into an account at the central bank on which the BOJ must pay interest. If rates go up, the central bank needs to pay more money in order to get more interest income.

An interest rate of just 0.5% on these accounts would be enough for the BOJ to pay more than it takes in, according to Izuru Kato at Totan Research.