The Bank of Japan (BOJ) reached a significant milestone at the end of September, when it held over 50% of outstanding Japanese government bonds for the first time. This was a result of the central bank’s efforts to keep bond yields low, even as other central banks, such as the Federal Reserve, began raising interest rates. The BOJ’s ownership of these bonds reached 536 trillion yen, or 50.26%, of the 1,066 trillion yen total.
The BOJ’s large bond holdings have helped to keep borrowing costs low for businesses and households in Japan. However, this strategy carries risks for the central bank. If the BOJ decides to exit its bond-buying program, it may face challenges due to the size of its balance sheet. In the six months leading up to September, the BOJ booked an unrealized loss of 874.9 billion yen on its government bond holdings, following a decline in bond prices due to global monetary tightening.
The BOJ is not alone in its large bond purchases. Central banks around the world, such as the European Central Bank (ECB), have also become major buyers of government bonds. This trend has raised concerns about systemic risk in the market. As central banks tighten monetary policy, interest rates rise and bond prices fall, leading to potential losses on central banks’ bond holdings. If these losses are realized, it could have significant implications for the global monetary system.
In addition to the risks associated with large bond purchases, the BOJ’s bond-buying program has also faced criticism for its impact on the bond market. Some argue that the central bank’s efforts to keep yields low have distorted the market and made it more difficult for investors to accurately assess the value of bonds. This can make it challenging for traders to make informed decisions when it comes to investing in government bonds, and may create additional risks for the trading community.
Another factor to consider is the impact of the BOJ’s bond purchases on the overall Japanese economy. The central bank’s efforts to keep borrowing costs low have helped to support economic growth, but some argue that this has also led to a lack of incentives for businesses and households to take on more debt. This can limit the ability of the economy to expand, and may have negative consequences in the long term.
According to Daniel Ang, a market strategist, central banks such as the BOJ and the European Central Bank (ECB) have become the largest buyers of government bonds, creating a systemic risk as interest rates rise and central banks, led by the Federal Reserve, tighten monetary policy aggressively. As bond prices fall under the pressure of higher rates, central banks may find themselves holding large amounts of unrealized losses on their bond holdings. These losses may be realized if the bonds are marked to market, which could potentially cause the entire monetary system to collapse. Ang warns that at some point, the consequences of these bond purchases will come to fruition, leading to the “Mother of all Financial Crises”.
In conclusion, the Bank of Japan’s ownership of over 50% of outstanding Japanese government bonds is a significant milestone that carries both risks and benefits. While the central bank’s bond-buying program has helped to keep borrowing costs low and support economic growth, it also carries risks for the central bank and the trading community. Central banks around the world have become major buyers of government bonds, which raises concerns about systemic risk and the potential impact on the global monetary system. It is important for traders to carefully consider these factors when analyzing the Japanese bond market and making investment decisions.
