Photo/Illutration The Bank of Japan’s head office in Tokyo (Asahi Shimbun file photo)

The Bank of Japan’s government bond holdings surged 10.6 percent from a year earlier to a record 581 trillion yen ($4.15 trillion) as of the end of fiscal 2022.

The central bank, which has maintained an ultra-loose monetary policy to stimulate the economy, was forced to buy a record 135 trillion yen in government bonds over the year to keep Japan’s long-term interest rates low.

These rates came under upward pressure after the U.S. Federal Reserve and European central banks raised rates to rein in inflation.

It was the first time in two years for the BOJ’s government bond holdings to hit a record, according to its financial statements for fiscal 2022 released on May 29.

The government bond holdings, which stood at about 125 trillion yen in fiscal 2012, increased more than fourfold over the decade.

Under Haruhiko Kuroda, who served as BOJ governor for 10 years from 2013, the central bank tried to keep interest rates low by buying government bonds to encourage business investments and housing purchases.

The amount of the BOJ’s total assets also ballooned more than four times from about 164 trillion yen in fiscal 2012 to about 735 trillion yen in fiscal 2022, which ended in March.

The BOJ owned more than 50 percent of outstanding Japanese government bonds as of the end of 2022.

Kazuo Ueda, who succeeded Kuroda as BOJ governor in April, sees problems in the massive government bond holdings.

“I think this is not necessarily what the balance sheet (statement of assets and liabilities) of a central bank should be,” Ueda told a Diet session on May 25.

According to the BOJ’s financial statements, its government bond holdings suffered about 157 billion yen in appraisal losses as of the end of fiscal 2022 as market prices of Japanese government bonds fell below their original purchase prices, or book values.

The appraisal losses will grow if interest rates rise because bond prices usually move inversely to interest rates.

The BOJ said the appraisal losses on its government bond holdings would total 28.6 trillion yen if interest rates rise by 1 percentage point overall, and the losses would reach 52.7 trillion yen if interest rates increase by 2 percentage points.

That means the BOJ’s liabilities could exceed its assets if interest rates rise substantially.

Still, the BOJ said any spike in interest rates would not affect its monetary policy.

It argues that the central bank will not suffer losses as long as it holds government bonds to maturity because they are evaluated at book value, not market prices, for accounting purposes.

Sayuri Kawamura of the Japan Research Institute disagrees.

In addition to problems with the huge government bond holdings, she pointed out that if the BOJ raises short-term interest rates, it would have to pay more in interest on current account deposits that private-sector financial institutions hold at the central bank.

Such interest payments on the current account deposits totaled 549 trillion yen in fiscal 2022.

Kawamura warned that the BOJ could lose its credibility as a central bank if its liabilities exceed its assets.

She said the BOJ should redouble efforts to return its monetary policy to normalcy, although the central bank has refrained from discussing an exit strategy from its large-scale monetary easing.

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