Bank of Japan's Long-Term Government Bond Possessions Decline for First Time in a Decade (Since 2008)
Tokyō — The Bank of Japan (BoJ) noticed a decline in its long-term government bond holdings for the first time in 16 years, marking an essential step in its retreat from a substantial stimulus policy that has lasted over a decade. The figures were disclosed in the central bank's earnings on Wednesday, May 28.
The BoJ's decision to scale back its bond purchases has led to an increase in interest expenses, as the bank paid ¥1.25 trillion ($8.3 billion) in interest on excess reserves kept within the BoJ. This move was aimed at absorbing excess liquidity from the market and nudging short-term borrowing costs closer to the BoJ's 0.5% policy rate.
As a result of the BoJ's monetary tightening policy, the bank incurred valuation losses of 28.6 trillion yen in the fiscal year ending in March, representing the largest such losses since the BoJ adopted its current accounting methods in 2004.
The BoJ started reducing its massive stimulus program in March 2023 and raised short-term interest rates to 0.25% in July and 0.5% in January. The central bank also began slowing its enormous bond purchases under a tapering program unveiled in July 2023.
As of the end of March 2024, the BoJ's holdings of long-term Japanese government bonds stood at ¥574.2 trillion, a decrease of ¥11.4 trillion from the previous year. This marked the first decline since 2008. The total government bond holdings, including short-term debt, fell by ¥13.7 trillion to ¥575.9 trillion, marking the first decrease in three years.
The BoJ is planning to continue tapering its bond buying, conducting an interim review of its tapering plan in its next policy meeting in June and unveiling a program for April 2026 and beyond. Most market players anticipate the BoJ to maintain or slightly slow the pace of tapering from April 2026 and beyond.
During his remarks in March, BoJ Governor Kazuo Ueda described the central bank's balance sheet as too large, highlighting the challenges associated with normalizing monetary policy and shrinking a balance sheet swollen from years of heavy bond buying, which now exceeds the size of Japan's GDP.
In terms of the broader implications, the BoJ's move to reduce bond purchases has contributed to market calm and restrained yield volatility while supporting modest economic growth. However, recent months have seen turmoil in global bond markets due to various factors, such as trade tensions and monetary shifts. This has resulted in a dramatic spike in long-term Japanese government bond (JGB) yields—including 20-, 30-, and 40-year JGB yields hitting multi-decade or all-time highs. The weakest 20-year bond auction since 2012 highlights investors' waning demand and heightened risk aversion.
These developments have resulted in a surge in Japanese government borrowing costs at a time when the country's debt-to-GDP ratio surpasses that of other developed economies. This poses a significant fiscal challenge, potentially requiring difficult policy choices between spending restraint and tax increases. Moreover, the rise in Japanese yields may reduce the attractiveness of the yen carry trade, leading investors to unwind positions and potentially repatriate funds, increasing volatility in global currency and equity markets.
Analysts project the BoJ will continue reducing its bond purchases at the current quarterly rate of ¥400 billion through March 2026, slowing to ¥300 billion per quarter from April 2026, likely extending for another year. The BoJ will remain cautious, closely monitoring the impact of yield volatility on economic growth and short-term borrowing costs, particularly amid uncertainty surrounding U.S. trade policy and global financial stability.
The Bank of Japan's (BoJ) ongoing tapering of its bond purchasing program, as seen in the decrease of its long-term government bond holdings, indicates a shift in its monetary policy, which is part of its business strategy to combat excess liquidity. This strategy, if continued, could impact the finance sector, with potential increases in Japanese government borrowing costs and potential implications for global currency and equity markets, particularly in light of the BoJ's large balance sheet and the current volatile global bond markets.
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