BOJ assets rival entire Japanese economy in scale
The bank’s US$4.49 trillion balance sheet is entering into uncharted territory
The Bank of Japan’s total assets are now equal to a whopping 93% of the country’s GDP, reports Nikkei Asian Review, with no end to the extraordinary easing policy in sight.
The unprecedented scale of the central bank’s balance sheet compares to Federal Reserve holdings equal to 23% of the US GDP, or those of the European Central Bank, which are equivalent to around 28% of the euro zone GDP.
Some fear that the bank’s purchases of Japanese government bonds to keep long-term rates near zero is setting the stage for disaster. Once the target inflation rate is met and the BOJ finally starts to raise rates, the bank will be paying more interest for reserve deposits than it will earn from the low-yield bond holdings:
“Hiroshi Fujiki, a professor at Chuo University, estimates that the BOJ will have to endure such negative yields for 10 years or longer once the 2% inflation target is reached. If the losses are large enough, the central bank could fall into a negative net worth. Some economists posit that the yen could lose its value significantly and usher in dramatic price inflation if the BOJ’s liabilities exceed its assets or if the bank starts suffering losses.”
Even if this worst case scenario is unlikely, the long-term monetary easing poses risks, with interest rates susceptible to sudden surges when the central bank finally does wind down its easy policy.