The Bank of Japan's soaring government bond holdings, a result of its monetary easing to prop up the economy, have given rise to concern that the central bank's purchases might go unchecked, effectively shouldering government debt.
According to BOJ data released Aug. 14, the balance of its holdings of long-term government bonds stood at 80.97 trillion yen ($1.03 trillion) as of Aug. 10, exceeding 80.79 trillion yen worth of bank notes in circulation for the first time.
The value of bank notes in circulation serves as a self-imposed cap by the BOJ for its bond holdings, excluding a fund the central bank created for an asset purchase program for monetary easing.
The BOJ said the balance of its bond holdings included bonds worth 14.5 trillion yen in the asset-buying fund. The remainder was held as BOJ assets.
Some economists have voiced concern, however.
“If the BOJ had not put aside its asset-buying fund, it would break its self-imposed rule at this point,” said Mari Iwashita of SMBC Nikko Securities Inc. “The bank should exercise caution and not give the impression that it is shouldering government debt.”
Passage of legislation to raise the consumption tax rate means that a brake will be applied to Japan's debt-laden public finance, at least partially.
But the BOJ is set to continue buying government bonds to stimulate economic activity. The central bank is also facing persistent calls from politicians and the market for further monetary easing.
The BOJ has been buying up government bonds from private banks as part of efforts to funnel money into the economy.
Problems arise when a central bank purchases government bonds on an unlimited basis. This would allow a government to borrow money without restraint, resulting in lax fiscal policies. That could cause a government bond’s credit to nosedive, pummeling bond prices and lifting long-term interest rates.
Out of such fears, the BOJ set its own rule of limiting its long-term government bond holdings to under the value of bank notes in circulation.
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