The World with Interest

The Bank of Japan announced that its unrealized losses on its Japanese government bonds marked ¥10.5 trillion at the end of September. As the bank is stepping into a change of zero-interest policy, the price of JGB is getting down, because the bond’s price goes down when its interest hikes. Some folks in monetary community recognize that this is the world with interest, after the long period of zero-interest policy.

According to the bank’s financial statements for the first half of FY 2023, its possession of JGB was ¥586.8 trillion in the paper price, which marked the record high. The bank attached related information to the statements, which revealed that the market value of those bonds would be reduced to as low as ¥576.3 trillion. The loss of value (difference between paper price and market price) was ¥10.5 trillion, outstandingly swelling from ¥157 billion at the end of March, or the second half of FY 2022.

 

BoJ has been purchasing a great amount of JGB under the leadership of former governor Haruhiko Kuroda. While the purpose of the policy, called “different dimension” monetary easing, was to supplying money to the market with low interest for supporting economy, its possession of JGB has increased by six times from the beginning.

 

Article 5 of Public Financial Act prohibits the government to let BoJ undertake governmental bonds or to borrow money from BoJ. BoJ interpreted Kuroda’s policy as “a purchase operation of JGB” through the market, not as the direct undertaking prohibited by the law. The policy was supposed to be linking with then Prime Minister Shinzo Abe’s economic policy called Abenomics, which upheld major monetary easing as one of three pillars.

 

But now, BoJ is expected to be searching for the exit from super monetary easing policy. The trigger of sudden down of JGB value is said to be the BoJ’s decision at the end of October, which allowed long-term interest rates to rise above 1%. It had a certain impact on the market, with speculation that BoJ was revisioning its policy of “yield curve control.” Interest rate of Japan 10-year government bond has been staying high in November.

 

High interest of JGB has negative impact not only on BoJ’s but the government’s finance, because the repayment for JGB will increase. Fiscal System Council submitted an opinion to Minister of Finance late November, which recommended to normalize the structure of budget from the emergency period of the pandemic, concerning huge amount of debt owed by Japanese government.

 

Kishida administration has not gotten rid of its tendency of depending on governmental bonds. The supplemental budget submitted to the Diet in November included ¥8.8 trillion of newly issued governmental bonds. If the annual budget for FY 2024 still depends on JGB, he will lose public confidence further.

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