BOJ pays record $14bn to government on ETF gains and bond interest

 

 BOJ pays record $14bn to government on ETF gains and bond interest


Payments by the BOJ to the government are seen as a critical source of funds for the country's defense buildup. 

TOKYO -- The Bank of Japan contributed a record 2.17 trillion yen ($13.8 billion) to the government's coffers in fiscal 2023, according to full-year results published Wednesday, though higher interest rates have fueled concerns over the central bank's financial future.

As a general rule, the BOJ's final profits after certain expenses and taxes are paid to the government as the nation's property. Such payments increased around 10% for the year ended March 31.

The central bank reaped profits from holdings of exchange-traded funds and bonds that it had bought under an unconventional monetary policy to fight deflation.

The bank enjoyed gains related to ETFs last fiscal year, thanks in part to publicly traded companies raising dividend payments. It also took in more interest from Japanese government bonds. The BOJ held 589 trillion yen in JGBs by book value at fiscal year-end.

Overall, the bank's operating profit reached a record 4.64 trillion yen.

At the same time, higher interest rates have squeezed bond prices. Unrealized losses on JGB holdings reached 9.43 trillion yen as of the end of March, compared with 157.1 billion yen a year earlier, though paper losses have little bearing on actual income since the BOJ assumes that it will hold the bonds to maturity.

Interest payments to financial institutions pose a greater concern for the BOJ moving forward.

The bank ended its negative interest rate policy in March. It is now guiding its policy rate to positive territory by paying a 0.1% rate on deposits by private-sector financial institutions.

Higher rates mean larger interest payments, which in turn could cancel out the rise in bond yields and result in losses for the BOJ.

Based on data from the first half of fiscal 2023, the BOJ could suffer an operating loss when the policy rate reaches around 0.6%, predicts Takahide Kiuchi of the Nomura Research Institute. Liabilities could exceed assets at 2.8%.

Given the current policy rate, 2.8% "seems unlikely even looking far into the future," Kiuchi said. Still, a higher policy rate would stoke greater concern over the BOJ's finances.

Some central banks abroad have already halted payments to their respective governments. The U.S. Federal Reserve suffered larger losses as it raised interest rates in the latter half of 2022, and it stopped contributing to the U.S. Treasury around September.

A decline in the BOJ's payments due to rising interest rates would hurt the government's financial resources. The payments are seen as an important source of funding for rising defense spending, and the government is concerned about them going down in the future.

Because the central bank can issue currency, the general view is that a worsening of its finances is not a problem in itself, but some point to the risk that it will hurt confidence in the currency.

The BOJ also recognizes that unnecessary confusion caused by excess attention to financial risks could erode confidence just when it is exiting its ultraloose monetary policy.