November 28, 2016
<The Effects of BOJ’s Quantitative and Qualitative Monetary Easing with Yield Curve Control>

BOJ’s JGB Purchasing Limits to be Reached in Summer 2017
— Is the Bank carrying out Fiscal Policy?
JCER Financial Research Team1
Kazumasa IWATA (President of JCER)
Ikuko FUEDA-SAMIKAWA (Principal Economist)
Eriko TAKAHASHI (Senior Economist)

On September 21, 2016, the Bank of Japan announced a new framework for strengthening monetaryeasing: “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC)”, replacing
the previously introduced policy, “QQE with a Negative Interest Rate”. It is the sixth unconventionalmonetary policy the BOJ introduced after Japan’s nominal interest rate reached its Zero Lower Bound(ZLB) in the late 1990s. Although the Bank strongly declared that “Japan's economy is no longer in
deflation” in their Comprehensive Assessment, published in September 2016, it has not yet succeeded in
attaining its inflation target of 2%. The latest figure shows that the consumer price index (CPI) for all items
less fresh food was negative 0.4 for October 2016, declining for eight consecutive months. Japan is now
under the imperative risk of slipping back into deflation.
To tackle the long persisting deflation, the BOJ has been purchasing unprecedentedly massive amountsof government bonds that in effect increased its balance sheet, exceeding 90% of Japan’s nominal grossdomestic product (GDP). The fabled monetary “bazooka” fired by Governor Haruhiko Kuroda in April
2013 appeared successful at first, raising inflation expectations. However, the BOJ had been running out ofwilling sellers of Japanese Government Bonds (JGBs) and was forced to shift its numerical target fromquantity to the policy rate. What is the real matter behind this?
In this report, we begin by looking through the BOJ’s various unconventional monetary policies. The
Bank has been likened to a “whale in the pond”, by becoming the biggest player in not only the JGB
market but also in Exchange-Traded Fund (ETF) market; its influence over their price formation is
criticized as being government-controlled. Is the bank carrying out fiscal policy? The soundness of the
BOJ’s balance sheet is becoming vulnerable, addressing the issue of central bank’s independence. With
regard to corporate governance, the fact that the Bank has become the largest stakeholder for a number ofprivate institutions via its large-scale ETF purchases can be seen as helping so-called “zombie companies”
to survive. This may drag Japan’s economy into secular stagnation.
1

Research Director: Ikuko SAMIKAWA (Principal Economist), Lead Researcher: Eriko TAKAHASHI (Senior Economist),
Trainee Economists: Yasuhisa HAKUBI (Aflac), Asuka NOMURA (Japan Housing Finance Agency), Tetsu SAITO (Joyo
Bank), Midori SHIRAISHI (Japan Finance Corporation).

- 1-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

1. BOJ’s Shift from Quantity to the Policy Rate
In September 2016, the BOJ introduced a new policy framework “QQE with Yield Curve Control(YCC)” . It is Japan’s sixth unconventional monetary policy under which the BOJ started to control the
long-term interest rate, by fixing 10-year government bond yield at zero percent. Although the policy
seems to have been successful in controlling the yield curve, Japan is currently facing the risk of slippingback into deflation.

1-1. Sixth Stage of BOJ’s Unconventional Monetary Policies
The BOJ has been taking a number of unconventional monetary policies since the late 1990s(Fig.1-1). The Bank introduced negative interest rate policy at the end of January 2016, and in
September, it began controlling the long-term interest rate. The current monetary framework is named“QQE with yield curve control”.
Back in April 2013, BOJ entered a new phase of monetary easing in terms of both quantity andquality, the so-called QQE. They announced that it will “achieve the price stability target of 2% at theearliest possible time, with a time horizon of about two years”. However, the headline inflation rate
has not yet reached the target level. In fact, the CPI core inflation rate -- the YoY rate of change in the
consumer price index (CPI) for all items less fresh food --has turned to be negative again.
What are the risks and effects of Japan’s QQE, including Negative Interest Rate Policy (NIRP)
and YCC? Will the monetary base target be sustainable? What happens if the Bank continues topurchase massive amount of JGBs?
Fig.1-1 BOJ’s Unconventional Monetary Policies【Unconventional Monetary Policies】(1) Zero Interest Rate Policy⇒Lowering Policy Rate

Feb 99～Aug 00(2) Quantitative Easing Policy⇒Quantitative Expansion

Mar 01～Mar 06【BOJ Governor &Term served】
Masaru Hayami
Mar 98～Mar 03
Toshihiko Fukui
Mar 03～Mar 08

Masaaki Shirakawa(3) Comprehensive Easing Policy⇒Purchasing Various Assets

Apr 08～Mar 13
Oct 10～Apr 13(4) Quantitative and Qualitative Easing Policy⇒Changing Expectations
Apr 13～Jan 16

Haruhiko Kuroda
Apr 13～Present(5) Quantitative and Qualitative Monetary Easing with a Negative interest Rate
⇒Introduction of NIRPJan 16～Sept 16(6) Quantitative and Qualitative Monetary Easing with Yield Curve Control⇒Introduction of Yield Curve Control
Sept 16～Present

Note: Monetary policies are sorted in order of announcement.
Source: BOJ

http://www.jcer.or.jp/- 2-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Under the leadership of Governor Haruhiko Kuroda, the BOJ introduced QQE, conducting
large-scale monetary easing in order to overcome Japan’s 15-year deflation, and to achieve its 2%
price stability target (Fig.1-2). As a result, corporate profits, measured by the ratio of current profits tosales, have been at a record-high level, while the unemployment rate has declined to as low as 3%.
However, on the price front, although the BOJ declared in the Comprehensive Assessment
published in September 2016 that Japan’s economy was no longer in deflation,--commonly defined asa sustained decline in prices-- the price stability target of 2% has yet to be achieved.
Consequently, the BOJ introduced the new monetary policy framework "QQE with Yield Curve
Control (YCC)", which consists of two major components: (1) YCC which aims to influence the longend as well as the short end of the yield curve and (2) Inflation-overshooting Commitment underwhich the Bank will continue expanding the monetary base until the core CPI inflation rate exceeds
2% and stays above the target in a stable manner.
Fig.1-2 Change in Monetary Policy under Governor Kuroda

Note: Monetary policies are sorted in order of announcement.
Source: BOJ

Since the introduction of QQE in April 2013, the BOJ had been purchasing JGBs of around 7
trillion yen (USD 63.6 billion) every month, and the amount was raised to around 9 trillion yen (USD
81.8 billion) every month after the expansion of QQE in October 2014.

http://www.jcer.or.jp/- 3-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

The average remaining maturity of the Bank’s JGB purchases was extended from about 7 years toaround 7-12 years at the end of last year (Fig.1-3). However, the guideline for average remaining
maturity was abolished with the introduction of QQE with YCC in September 2016.
Fig.1-3

BOJ's JGB Purchases(Trillion yen)
31 years～
21～30 years
16～20 years
12
11～15 years
8～10 years
6～7 years
10
4～5 years
2～3 years～1 year
8
Average redemption periods (RHS)(Years)14

Expansion of QQE

NIRP

14
12

QQE
10
8

6

6

4

4

2

2

0
10/01

（Monthly）
10/07

11/01

11/07

12/01

12/07

13/01

13/07

14/01

14/07

15/01

15/07

16/01

0

16/10
16/07

Note: 1. Face value basis. Including JGBs purchased through the asset purchase fund.
2. Long-term JGBs are JGBs excluding treasury discount bills, and there is no distinction in terms of time period left
to reach maturity (remaining maturity).
Source: BOJ, Issue-by-Issue for JGBs; MOF, Buyback Auction Results; Estimated by JCER Financial Research team

The Bank’s JGB holdings have been increasing rapidly. The outstanding amount of long-term
JGBs held by the BOJ came to almost 350 trillion yen (USD 3.2 trillion) at the end of October 2016.
In the past three and half years under QQE, both monetary base and the outstanding amounts of JGBs
have more than tripled.
The average remaining maturity period of JGBs that the Bank holds has lengthened rapidly since
the introduction of QQE (Fig.1-4). The remaining period was extended to around 7.4 years at the endof October 2016. Under the past QE and Comprehensive Easing policies, although the outstanding
amount of long-term JGBs increased, the remaining maturity period shortened because the BOJ
bought shorter-term JGBs. This is why the BOJ is said to have entered a new phase of monetaryeasing in April 2013.
The remaining maturity of JGBs held by the Bank indicates that it will take over seven years forredemption. This will make it hard for the BOJ to reduce its own balance sheet without selling JGBs
in the Bank’s “exit” phase.

http://www.jcer.or.jp/- 4-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig.1-4 BOJ’s JGB Holdings
400(Trillion yen)

(Years)

16 years~
11~15 years
8~10 years
6~7 years
4~5 years
2~3 years~1 year
Remaining Maturity (RHS)

350
300
250
200

10

NIRP
9

Expansion of QQE
QQE

8
7
6

150

5

100

4

50

3
（Monthly）

0
10/01

2
10/07

11/01

11/07

12/01

12/07

13/01

13/07

14/01

14/07

15/01

15/07

16/01

16/10
16/07

Note: 1. Face value basis. Including JGBs purchased through the asset purchase fund.
2. Long-term JGBs are JGBs excluding treasury discount bills, and there is no distinction in terms of time period left
to reach maturity (remaining maturity).
Source: BOJ, Issue-by-Issue for JGBs; MOF, Buyback Auction Results; Calculated by JCER Financial Research TeamAt the end of September 2016, the total asset of BOJ was 463 trillion yen (USD 4.2 trillion),
which accounted for over 90% of nominal GDP, far above the levels of any other major central banks
in advanced economies (Fig.1-5); QQE is truly an unprecedented measure of monetary easing in our
modern history.
Fig.1-5 Total Assets of BOJ exceeds 90% of Nominal GDP
90
80
70
60
50
40
30
20
10
0

【Total Assets of Central Banks】(% of nominal GDP)
BOJ

FRB

ECB

(Quarterly)
05:1

06:1

07:1

08:1

09:1

10:1

11:1

12:1

13:1

14:1

15:1

16:1 16:3

Source: BOJ, BEA, FRB, Bloomberg

In January 2016, the BOJ announced the introduction of NIRP, and started to operate a so-called“Three-Tier System”, where the BOJ current account balance is divided into (1) Basic Balance: apositive interest rate of 0.1% will be applied, (2) Macro Add-on Balance: zero interest rate will be

http://www.jcer.or.jp/- 5-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

applied, and (3) Policy-Rate Balance: a negative interest rate of -0.1% will be applied (Fig.1-6 left).
Therefore, a negative interest rate is only applied to a marginal increase in the current account balancebut it has its full impact on the market rate.
Under the new system, some financial institutions hold current account balances in the tier towhich the negative interest rate is applied, while other institutions have unused allowances in tiers towhich the zero or positive interest rate is applied. Financial institutions that have unused allowances intiers to which the zero or positive interest rate is applied can raise funds in the interbank money
market from other institutions at a rate between negative 0.1% and 0%, so this is profitable for bothsides. Other financial institutions that hold balances to which the negative interest rate is applied canoffer short-term funds at a rate higher than negative 0.1%, in the market. Fig.1-6 (right) shows thatafter these arbitrage transactions took place, the net amount of negative-rate balances for
September-October 2016 totaled 15 trillion yen (USD136.4 billion) for those financial institutions
subject to the reserve requirement, such as Japan Post Bank.
Fig.1-6 Three-Tier System and the Current Account Balance to which Negative Interest Rate applies

Note: 1. Others A: Other institutions subject to the reserve requirement (e.g. Japan Post Bank).
2. Others B: Other institutions holding current accounts with the BOJ.
Source: BOJ

http://www.jcer.or.jp/- 6-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

After the introduction of NIRP in January 2016, activities in the call market stagnated (Fig. 1-7-1).
Particularly, in the collateralized call market, the amount outstanding fell sharply (Fig.1-7-2).
Fig.1-7-1 Amount Outstanding in the Call Money Market(Trillion yen)
Announcement/Introduction of
NIRP (Jan 29, 2016/Feb 16, 2016)

30
25

Announcement of QQEwith Yield Curve Control(Sept 21, 2016)

20
15
10
5

(Daily)

0
16/01
16/02
16/03
16/04
16/05
16/06
Note: Daily data up to and including Nov 25, 2016.
Source: NEEDS-FinancialQUEST

16/07

16/08

16/09

16/10

16/11 16/11

Fig.1-7-2 Amount Outstanding in the Call Money Market
8.0【Uncollateralized Call Market】(Tril. yen) Lender
Borrower

16
14
12
10
8
6
4
2
0

6.0
4.0
2.0
0.0
16/01 16/04 16/07 16/10 16/01 16/04 16/07 16/10
City Banks
Regional Banks
Foreign Banks
Securities
Insurance Companies
Other【Collateralized Call Market】(Tril. yen) Lender
Borrower

16/01 16/04 16/07 16/10 16/01 16/04 16/07 16/10
Trust Banks (excl. Investment Trusts)
Investment Trusts

Source: BOJ, Amount Outstanding in the Call Money Market

1-2. Increasing Risk of falling back into Deflation
QQE started in April 2013, with the target of achieving 2% YoY change in CPI. From late 2013 tomid-14, it seemed things were on track to achieving the BOJ’s target (Fig.1-8). However, prices
started slipping from mid-14 onward, due to the decline in oil prices, as well as the slowdown ofcommodity exporting and emerging economies especially China. Prices have been continuing to fallin 2016. The core CPI inflation rate for September 2016 was negative 0.5%, which was the lowest
since March 2011, when the Great East Japan Earthquake occurred. The latest figure for October was
negative 0.4%, recording a negative YoY rate for eight months straight.

http://www.jcer.or.jp/- 7-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig.1-8 Consumer Price Index (CPI)
2.5
2.0
1.5
1.0

(YoY, %)
Headline CPI
Core CPI
Core core CPI
BOJ Core CPI (2010 base)
BOJ Core CPI (2015 base)

0.5
0.0
-0.5

(Monthly)

-1.0
12/01
12/07
13/01
13/07
Source: BOJ, NEEDS-FinancialQUEST

14/01

14/07

15/01

15/07

16/01

16/07 16/10

The Nikkei CPI Now index is a price indicator based on daily scanner data collected from over
800 supermarkets. Prices soared from 2015 onward, reaching 1.9% YoY in February 2016, just shortof 2% (Fig.1-9 left). However, the YoY rate of change quickly slowed, and slipped into negative
territory from August onward.
The SRI-Hitotsubashi University Consumer Purchase Index, a weekly price index based on
Point-of-Sale (POS) data of 4,000 stores, shows similar trends (Fig.1-9 right).
Fig.1-9 Daily Price Indices
2.0
1.5(YoY, %)

1.0

Nikkei CPINow T-Index(7-day MA)

0.8
0.6

1.0

(YoY, %)SRI-Hitotsubashi University
Consumer Purchase Index

0.4

0.5

0.2

0.0

0.0
-0.2

-0.5
(Daily)-0.4(Weekly)
-1.0
-0.6
16/11
16/11
13/10 14/04 14/10 15/04 15/10 16/04 16/10
13/10 14/04 14/10 15/04 15/10 16/04 16/10
Note: Daily data up to and including Nov 25, 2016, and weekly data up to and including Nov 14, 2016.
Source: Nowcast, Hitotsubashi University

With the introduction of QQE with YCC in September this year, the BOJ abandoned its 2 year
timeframe for achieving 2% inflation target. It has become a medium-term target with no specific timeframe. According to its latest October Outlook Report, the BOJ pushed back the timing of achieving
its 2% price target from “during FY2017 (ending March 2018) to “around FY2018” (Fig.1-10).

http://www.jcer.or.jp/- 8-

Japan Center for Economic Research
Financial Research Team

Fig.1-10
2.5

November 28, 2016

BOJ postpones the Target Date of reaching the Price Stability Target【FY16 Inflation Forecast】(YoY,%)

2.5【FY17 Inflation Forecast】(YoY,%)

2.5

2.0

2.0

2.0

1.5

1.5

1.5

1.0

1.0

1.0

0.5

0.5

0.5

0.0

(Quarterly)

-0.5
14:2

15:2

16:2 16:4

0.0(Quarterly)-0.5【FY18 Inflation Forecast】(YoY,%)

0.0(Quarterly)

-0.5

16:4
15:2
15:4
16:2
16:4
Maximum
MedianMinimum
Note: The horizontal axis indicates the release date of the Outlook Report.
Source: BOJ, Outlook for Economic Activity and Prices

16:2

16:3

16:4

The Fig.1-11 shows different measures of inflation expectations at four different points in time A: 2013Q1 before the introduction of QQE, B: 2014Q3 before the expansion of QQE, C: 2015Q4
before the introduction of NIRP, and D: 2016Q2 after the introduction of NIRP.
Comparing the change in inflation expectations from pre-QQE to Post-NIRP, we find that
expectations rose in about half of the indicators. However, comparing the changes before and after the
introduction of NIRP, it is clear that the policy hurt inflation expectations, causing them to weaken.
Fig.1-11 Inflation Expectations(%, %pt)
B. 2014Q3
C. 2015Q4 D. 2016Q2 Difference Difference
A. 2013Q1(Pre-QQE(Pre-NIRP) (Post-NIRP) (D - A)
(D - C)(Pre-QQE)
Expansion)
In 1 year
-0.5
0.6
0.5
0.5
+1.0
+0.0
ESP
In 2-6 years
0.7
1.4
1.3
1.0
+0.3
-0.3
Forecasts
In 7-11 years
1.0
1.5
1.4
1.0
+0.0
-0.4
In the next year
0.1
2.3
0.5
0.3
+0.2
-0.3
QUICK
In the next 2 years
0.6
2.1
1.0
0.6
+0.0
-0.4
SurveyIn the next 10 years
1.1
1.6
1.1
0.9
-0.2
-0.2
Consensus Forecasts (in 5 years)
0.3
1.6
1.3
1.1
+0.8
-0.2
BEI, inflation indexed bonds (10 years)
―
1.1
0.7
0.3
―
―
Inflation Swap Rate (5 year/ 5 year)
0.8
1.1
0.7
0.1
-0.7
-0.6
Tankan In 1 year
―
1.5
1.0
0.7
―
―
―
1.6
1.3
1.1
―
―
(Inflation In 3 years
―
1.7
1.4
1.1
―
―
expectations) In 5 years
Consumer Confidence Survey (In 1 year)
1.9
2.9
2.4
2.1
+0.2
-0.3
In the past year
0.2
5.0
4.3
3.0
+2.8
-1.3
BOJ Opinion
In the next year
3.0
3.0
3.0
2.0
-1.0
-1.0
SurveyIn the next 5 years
2.0
2.0
2.0
2.0
+0.0
+0.0
Note: 1. Daily and monthly data have been converted to quarterly data.
2. ESP forecasts exclude consumption tax-hike effects. Dec 2012, June 2014, Dec 2015 and June 2016 values are used
for the periods A through D.
3. Consensus forecasts: Oct 2012, April 2014, Oct 2015 and April 2016 values are used for the periods A through D.
4. Tankan: All industries/ all enterprises data, average.
5. Consumer confidence survey: All households’ data, weighted average.
6. BOJ opinion survey: median data.
Source: JCER, QUICK, Bloomberg, BOJ, Cabinet Office

http://www.jcer.or.jp/- 9-

Japan Center for Economic Research
Financial Research Team

November 28, 2016

1-3. QQE with Yield Curve Control
Yield Curve Control
The “Yield Curve Control (YCC)” aims to influence the long end as well as the short end of theyield curve. The BOJ will seek to maintain the long-term interest rate at the present 0% level orthereabouts. When the long-term interest rate rises over 0%, the Bank will purchase JGBs so that
10-year JGB yields will remain more or less at the current level (around 0%). This means the BOJ has
strengthened its commitment to maintain the 0% long-term rate. BOJ Policy Board Member Yutaka
Harada stated that the Bank would tolerate a declining long-term interest rate but not an increasingone.
The measure looks similar to the long-term interest rate pegging system taken by the US Federal
Reserve Board until 1951, although capital movements were severely restricted during wartime andunder the Bretton Woods regime. There is another issue of whether the central bank can control
long-term interest rates, which consist of expected short-term interest rate and risk premiums
including term premium. In addition, JGBs with a wide range of maturities will continue to be eligible
for purchase, while the guideline for average remaining maturity of the Bank's JGB purchases has
been abolished.
After the beginning of NIRP in February this year, JGB yields fell sharply (Fig.1-12). They further
declined in July after Britain voted out of the EU; even 20-year JGB yields turned negative for the
first time, falling as low as negative 0.005% .
Fig.1-12 JGB Yield turned Negative in early 2016
(%)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
13/01
13/07

14/01
14/07
1-Year

15/01
15/07
2-Year

16/01
5-Year

(%)
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
(Daily)-0.5
16/0716/11
16/01 16/04 16/07
7-Year
10-Year(Daily)
16/11
16/10

Note: Daily data up to and including Nov 25, 2016.
Source: Bloomberg

However, after the US Presidential election, Japan’s long-term interest slightly increased. The
market strengthened expectations for a December rate rise by the Fed, and the JGB yield curve turned
anti-clockwise after the introduction of QQE with YCC (Fig.1-13). On November 17, the BOJ
announced for the first time that it would buy as many JGBs as the market wanted to sell with one to
five years left to maturity at a fixed price, asserting its new cap on the yield curve. It did not bid for

http://www.jcer.or.jp/- 10 -

Japan Center for Economic Research
Financial Research Team

November 28, 201610-year bonds, where it has capped the yield at 0%.
Fig.1-13 JGB Yield Curve turned anti-clockwise after the Start of QQE with YCC
2.0(%)
Mar 2013 (Pre-QQE)

1.5
Jan 2016 (Pre-NIRP)
1.0
Aug 2016 (Pre-QQE with yield curve control)
0.5

Nov 2016 (Present)

0.0(Year)

-0.5
1
2
3
4
5
6
7
8
9
10
15
20
Note: Data for Nov 2016 is the average of data from November 1, 2016 through November 25, 2016.
Source: Bloomberg

30

40

Inflation-Overshooting Commitment
Under the “inflation-overshooting commitment,” the BOJ will expand liquidity with the aim ofachieving a stable, observed inflation rate greater than 2% (Fig.1-14). The inflation rate implied here
is core CPI (all items less fresh food). As we see in Fig. 1-8, core CPI has been in negative territory
for eight months straight, which implies that it will take time for the BOJ to reach the exit phase of thecurrent unprecedented easing policy.
Fig.1-14 Inflation-Overshooting Commitment

Source: BOJ “Economic Activity, Prices, and Monetary Policy in Japan (Oct 12, 2016 Speech at a Meeting with
Business Leaders in Nagano)” (Yutaka Harada, BOJ Policy Board Member)

http://www.jcer.or.jp/- 11 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

2. Government-controlled JGB and ETF Markets
Since the BOJ has been the largest buyer of JGBs, the market is criticized as being“government-controlled”. Those JGBs with relatively higher coupon rates held by the Bank have
gradually reached their maturities and the average coupon rate is currently 0.77%, having declined by
0.34 percentage points since the start of QQE. The BOJ is ironically called the “whale in the pond” inthe ETF market, not to mention the JGB market. This increases the risk of the BOJ incurring losses if asharp decline in stock prices occurs.

2-1. BOJ’s “Whale in the Pond” Issue 1 : JGB Market
Three and a half years have already passed since the introduction of Quantitative andQualitative Monetary Easing (QQE) in April 2013. Since the start of QQE, the BOJ has purchased
large quantities of government bonds from the market on a monthly basis. Fig. 2-1 shows the flow of
JGB net buyers and sellers. Under QQE, net JGB purchases by the BOJ have more than doubled,
totaling 359.6 trillion yen (USD 3.3 trillion for 2014Q2-2016Q3). The JGB market remains stable, but
if such purchases by the Bank were regarded as monetizing government debt, the JGB market may
start destabilizing, raising long-term interest rates. This could not only offset monetary easing effects,
but also have a negative impact on Japan's financial system.
The BOJ has repeatedly stated that JGB purchases under QQE are executed for the purpose of
conducting monetary policy and not for financing fiscal deficits. However, to avoid any skepticism
regarding this issue, it is vital for the government to clearly show the future course of fiscal
consolidation and steadily make progress to reform the fiscal structure.
Fig. 2-1 JGB Net Buyers and Sellers
4030(Trillion yen)
Foreigners
City Banks and Regional Banks
Agricultural, Forestry and Fishery Fin. Insts.

BOJ
Trust Banks
Insurance Companies

20
10
0
-10
(Quarterly)

-20
04:2

05:2

06:2

07:2

08:2

09:2

10:2

11:2

12:2

13:2

14:2

15:2

16:3
16:2

Note: Data excludes T-Bills.
Source: JSDA

In addition to the BOJ, overseas investors have been increasing their purchases of JGBs andTreasury Bills (Fig. 2-2). Although both short-term and long-term interest rates have been negative inJapan, the dollar-yen swap rates have also been negative, which helps overseas investors to earn extra

http://www.jcer.or.jp/- 12 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

interest. The amount of T-Bill purchase by overseas investors has rapidly been increasing undernegative interest rates.
Fig. 2-2 Dollar-yen Swap Rate and Overseas Investors
25
20
15
10
5
0
-5
-10
-15
-20
-25

(bps)

（Trillion yen）
T-Bills etc
10Y currency basis swap rate(RHS)
3M currency basis swap rate(RHS)

Government bonds
1Y currency basis swap rate(RHS)(Monthly)
09/01

10/01

11/01

12/01

13/01

14/01

15/01

16/01

16/09

100
80
60
40
20
0
-20
-40
-60
-80
-100

Source: JSDA, Bloomberg

How have the BOJ holdings of government bonds changed as a result of the BOJ trade? In Fig.
2-3, the vertical axis charts the balance of government bonds held by the BOJ, while the horizontal
axis shows the nominal coupon for government bonds. At the end of March 2013 (before the start of
QQE), 20-year bonds with coupon rates of 4.0% or higher accounted for approximately 1.1 trillion
yen (USD 10 billion), but by January 2016, approximately three years later, the balance was zero as
the redemption period edged closer. As recently as the end of October 2016, only 740 billion yen(USD 6.7 billion) worth of 20-year bonds with a yield of 3% or higher remained. The high coupon
government bonds issued in the past are gradually coming up for redemption. At the end of March
2013, the weighted average interest [(balance by issue x nominal coupon) / total balance] forgovernment bonds held by the BOJ was 1.11%, but by the end of October 2016 it had declined to
0.77%, down by 0.34 percentage points.

http://www.jcer.or.jp/- 13 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 2-3 Nominal Coupon Rate and Amount of JGBs held by BOJ
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

(Trillion yen) 【Pre-QQE (March 2013)】

(%)
0.0

7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

1.0
2.0
3.0
4.0
(Trillion yen) 【Pre-NIRP (Jan 2016)】

0.0
1.0
2 year bonds

5.0

6.0

7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

(Trillion yen) 【Pre-QQE Expansion (Oct 2014)】

0.0
1.0(Trillion
yen)
7.0

6.0
5.0
4.0
3.0
2.0
1.0
(%)
0.0
2.0
3.0
4.0
5.0
6.0
0.0
1.0
5 year bonds
10 year bonds
20 year bonds

(%)
2.0
3.0
4.0
【Present (Oct 2016)】

5.0

6.0

(%)
2.0
3.0
4.0
5.0
6.0
30 year bonds
40 year bonds

Source: BOJ, MOF

The S&P/JPX Japanese Government Bond VIX Index (Fig. 2-4 top left), which indicates the
expected volatility of futures prices for long-term government bonds, rallied in February 2016 as aresult of the negative interest rate policy. Later, the trend turned upward again for a time, but the rate
dropped below 2.0 points when QQE with YCC was released in late September 2016. The bid-ask
spread (Fig. 2-4 top right), which is the difference between the price (bid) proposed by the buyer ofgovernment bonds and the seller’s price (ask), is holding steady in the near term. The price/trading
volume ratio (Fig. 2-4 bottom left), which is the ratio of price change to trading volume, rose sharply
when the BOJ decided against any additional easing at the Monetary Policy Meeting at the end of July
2016, and announced a comprehensive assessment at the next policy meeting.

http://www.jcer.or.jp/- 14 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 2-4 Volatility of JGBs
(Bid-ask spread)【L-T JGB Bid/Ask Spread】 (L-T Rate)
16
1.2
Bid/Ask SpreadTightness
14
1.0
Volatility
L-T Rate (RHS)
5.0
12
0.8
10
0.6
4.0
8
0.4
6
0.2
3.0
4
0.0
2
-0.2
2.0
0
-0.4
(Daily)(Daily) -2
-0.6
1.0
16/11
15/01
15/07
16/01
16/07
16/11
15/01
15/06
15/12
16/06
【L-T JGB Futures Price Range to(YoY, %point) 【JGB Quarterly Transaction Volume】(2012=100)
40
Transaction Volume Ratio】
Medium300
Volume30
Resiliency
Long
250
20
Super long
10
200
Total
0
150
-10
100
-20
50
-30
(Daily)(Quarterly)
0
-40
16:3
15/01
15/07
16/01
16/07 16/11
12:1 12:3 13:1 13:3 14:1 14:3 15:1 15:3
6.0

【S&P/JPX JGB VIX】

(Point)Note: Daily data up to and including Nov 16, 2016.
Source: Japan Exchange Group, JSDA, QUICK, Bloomberg

2-2. BOJ’s “Whale in the Pond” Issue 2: ETF Market
Not only the JGB market, but also the ETF market is now described as being
government-controlled. Fig. 2-5 shows the flow of trading by investment sector in the ETF market.
The BOJ started to buy ETFs in December 2010, but the bank accounts for the majority of buying
since 2011. At the Monetary Policy Meeting in July 2016, the BOJ increased the amount for ETF
purchases from 3.3 trillion yen to 6 trillion yen (from USD 300 billion to 545.5 billion). In September
2016, the Bank spent approximately 800 billion yen (USD 7.3 billion) on buying, exceeding the 2012
performance in a single month, providing plain evidence of a government-controlled market.
Fig. 2-5 Trading Value of ETFs by Investor Type (Flow)
4.0(Trillion yen)

1.0
0.8

3.0
Buying

0.6

2.0

0.4

1.0

0.2
0.0

0.0
Selling -1.0

2011
Individuals(Trillion yen)

(CY)
2012
2013
2014
Foreigners
BOJ

-0.2
-0.4

2015
16/01
16/03
Financial and Securities Institutions(Monthly)
16/09
16/05
16/07
16/09
Other Companies

Note: 1.Data excludes foreign ETFs.
2.We assume that the BOJ does not make direct ETF purchases through the stock exchanges, and that it does
not sell any of the ETFs that it has purchased.
3. Data excludes ETFs that to support firms proactively investing in physical and human capita.
Source: Tokyo Stock Exchange, BOJ

http://www.jcer.or.jp/- 15 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

The BOJ mainly buys ETFs linked to three indices (TOPIX, Nikkei 225, and JPX 400)2. Fig. 2-6
shows the fluctuations in the three indices. The market capitalization of the First Section of the Tokyo
Stock Exchange is extremely large at 516 trillion yen (USD 4.7 trillion) as of October 31, 2016, but
the influence of the BOJ buying is gradually increasing. At the Monetary Policy Meeting on October
31, 2014, the BOJ decided to increase the annual spending amount from one trillion yen to threetrillion yen (from USD 9.1 billion to 27.3 billion). There was a large increase in the stock indicestoward the end of 2014, which can be seen in Fig.2-6. In early 2016, the indices fell in apparent
support of lower prices due to cheap oil, turmoil in the foreign markets, and the appreciation of theyen. There were claims that “BOJ buying boosted the Nikkei Average by 1,000~2,000 yen” (USD
9.1~18.2), and we can say that the BOJ increased its presence in the stock market as well as the JGB
market.
Fig. 2-6 Trend of Major Stock Indices25,00020,000(Yen, Points)
Nikkei225(Points)
JPX Nikkei400

TOPIX（RHS）

2,500
2,000

15,0001,500

10,000

1,000

5,000

500

0
11/01
12/01
13/01
Note: Daily data up to and including Nov 16, 2016.
Source: NEEDS-FinancialQUEST（Daily）
14/01

15/01

16/01

0

16/11

The BOJ holdings of ETFs exceeded 10 trillion yen (USD 90.9 billion) at the end of October 2016.
The Bank, now the biggest player in ETF market, has been only buying and not selling ETFs.
However, if ETF prices should decline sharply, the BOJ would need to set aside adequate reserves tocover for the losses, which would reduce the Bank’s profits.
Fig. 2-7 estimates the BOJ’s ETF holdings. The BOJ has bought ETFs linked to the three indicesin proportion to the total market capitalization of each issue, partially revised at the September 2016
monetary policy meeting. For this estimation, we used data for 20 issues as of the end of October 2016
handled by the Japan Exchange Group, and selected from the ETFs linked to the three indices. Since
the BOJ spending on ETFs has been constant during the month, the purchasing price is proportionally
distributed according to market capitalization per issue at the end of the month prior to the day ofpurchase. In our estimation, the average acquisition price is currently lower than the current shareprice, resulting in unrealized profits for the BOJ. ETF market capitalization totaled 15.8 trillion yen
2

The BOJ also purchases ETFs to support firms proactively investing in physical and human capital.

http://www.jcer.or.jp/- 16 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

(USD 143.6 billion) at the end of September 2016, with the BOJ accounting for 69% of the total
amount.
Fig. 2-7 BOJ’s ETF Holdings(Billion yen)（End of the Month）

Nikkei
225

March 2011
March 2012
March 2013
March 2014
March 2015
March 2016
Sept 2016

101
447
822
1,518
2,442
4,035
5,301

Purchased Amount
JPXTOPIX Nikkei
400
104
427
751
1,350
2,098
31
3,388
145
4,372
249

Total
204
874
1,572
2,868
4,571
7,567
9,922

Valuation at Market Prices
JPXNikkei
TOPIX Nikkei
Total
225
400
99
102
201
491
455
947
1,112
988
2,099
2,058
1,767
3,825
3,724
3,115
34
6,872
4,660
3,855
129
8,645
5,844
4,778
231 10,853(Yen, Points)
Average of Purchase Price
JPXNikkei
TOPIX Nikkei
225
400
9,921
885
9,172
800
9,160
787
10,934919
12,5981,039 13,074
14,5091,184 13,611
14,9201,210 12,787

Note: 1. We assume that the BOJ does not make direct ETF purchases through the stock exchanges, and that it does not sell
any of the ETFs that it has purchased.
2. Data does not take into account the difference between each ETF’s operational performance and stock index,
dividends and various fees.
Source: BOJ, NEEDS-FinancialQUEST

Although the BOJ buys large quantities of ETFs, share prices could potentially make a sharp fall.
Looking at annual fluctuation rates for the Nikkei Stock Average since FY2001, we find that it was
negative for seven years, the average magnitude of decrease being 19.0%, and the largest decrease
was 35.3% in FY2008, the year of the collapse of Lehman Brothers3. Fig. 2-8 summarizes thevaluation amounts and the valuation profit/loss if the stock price decreases by 19.0% or 35.3%. The
estimation for the end of FY2017 was prepared on the basis of the estimate at the end of September
2016, assuming that half of the annual purchases were bought at current share price levels.
If there is a drop of 19.0% at the end of 2017, the loss on valuation would be 1.7 trillion yen (USD
15.5 billion), and if there is a drop of 35.3%, the loss on valuation would be 3.9 trillion yen (USD 35.5
billion). Ordinary income at the BOJ for the fiscal year ending March 2016 was 800 billion yen (USD
7.3 billion), net assets 3.5 trillion yen (USD 31.8 billion), and net worth including account reserves 7.4
trillion yen (USD 67.3 billion). At present, there are no reserves for ETFs4, and even at around half of
the average drop in the past, there would be a deficit, causing great harm to finances. The BOJ has notmade clear what it intends to do with its ETF holdings upon its exit operations. The BOJ has started
selling equities bought in the past from April 2016, planning to offload 1.3 trillion yen-worth (USD
11.8 billion-worth) of equities in the next 10 years. By the end of FY2016, the BOJ’s ETF holdings is
expected to amount to 10 times that of equities; if it were to sell off its massive ETF holdings, theprocess would be lengthy, and the BOJ would be prone to facing long-term risk exposures.
3

Estimated from the opening price of the first business day of April and the closing price of the last business day of March.
The BOJ has been accumulating reserves, and posted net transfers to provisions for unrealized losses on index-linked
exchange-traded funds in the settlement of accounts for FY2010, but these were terminated in the FY2011 settlement ofaccounts.
4

http://www.jcer.or.jp/- 17 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 2-8 Simulation Result in the Case of Market Prices Fall
(Yen, Points)
Market Prices

1,323

JPXNikkei
400
11,846(Billion yen)
Valuation at Market Prices
Valuation Gain or LossJPXJPXNikkei
Nikkei
TOPIX Nikkei
Total
TOPIX Nikkei
Total
225
225
400
400
5,844
4,778
231 10,853
543
406
-18
931

13,324

1,071

9,596

4,734

3,870

187

8,791

-567

-502

-62

-1,131

10,643

856

7,665

3,781

3,092

149

7,022

-1,520-1,281-100-2,90016,4501,323

11,846

6,643

6,764

296

13,703

538

412

-18

931

13,324

1,071

9,596

5,381

5,479

240

11,099

-724

-873

-75

-1,672

10,643

856

7,665

4,298

4,376

192

8,866

-1,807-1,976-123-3,906

Nikkei225

TOPIX

As of Sept 30, 2016
Case 119% Fall in Market Prices
Case 2
35% Fall in Market Prices

16,450

As of March 31, 2017
Case 119% Fall in Market Prices
Case 2
35% Fall in Market Prices

Note: 1. Case1: Average of years the Nikkei 225 index YoY change turned negative from FY2001 onward (averageover 7years: -19%).
2. Case2: Largest % fall in the Nikkei 225 index YoY change (FY2008: -35%)
Source: BOJ, NEEDS-FinancialQUEST

The monopoly on the ETF market and the risk of a decline in prices are not the only problems
involving BOJ purchases of ETFs. By buying ETFs, the BOJ becomes the largest shareholder in many
companies. Fig. 2-9 indicates the extent of the BOJ’s indirect holdings of shares in index component
issues through ETFs. For the estimation, we used the weights of individual issues in each index, theindexed ETF holdings shown in Fig. 2-7, and the closing price on September 30, 2016. Moreover, we
judged whether the Bank is the largest shareholder based on the number of shares held by the leading
shareholders excluding trust accounts, and the number of actual BOJ share holdings. Results indicatedthat the bank is already the largest shareholder of approximately a quarter of the companies on the
Nikkei 225. Furthermore, the Bank’s holding ratio of floating stocks now exceeds 10% in 35
companies, over 40% in some. The BOJ’s massive holdings leads a fall in floating stocks, which may
cause individual stock liquidity to deteriorate.
Fig. 2-9 BOJ’s Rise to Top Shareholder of Companies

Nikkei 225
JPX-Nikkei 400
TOPIX

Number of Companiesof which the BOJ is
the Largest Shareholder
54
36
55

Number ofCompanies Surveyed
225
395
1980

% of Total
24.0
9.1
2.8

Note: 1.Data excludes security investment trust account,
2. Family shareholders are not taken into consideration.
Source: BOJ, NEEDS-FinancialQUEST

Since the BOJ holds shares indirectly through ETFs, the shareholder voting right is held by thecompany operating the ETFs. It has been pointed out that “since ETF commissions are low, there is notime for operating companies to spend on analysis or using a proxy to represent shareholders. The

http://www.jcer.or.jp/- 18 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

market oversight role is hollowed out by the use of proxies to represent shareholders”. In February
2014, the Financial Services Agency published the Japanese Version of the Stewardship Code, acollection of rules for the “responsible institutional investor.” Although the Government Pension
Investment Fund (GPIF), which manages employee pensions and national pensions, entrusts the
management of shares to other institutions, it has announced a policy of meeting its stewardship
responsibilities by cooperating with the entrusted institutions. The BOJ is said to be the realshareholder of long-term holdings, and if the BOJ continues to buy, its presence will only increase.
The BOJ may have to find some way of fulfilling its responsibilities as a major shareholder.
2-3. Limits to the BOJ’s JGB Purchases on the Horizon?
At the Monetary Policy Meeting at the end of September 2016, the BOJ revised its buying policy
for government bonds as of October 2016. The bank will reduce investment in bonds with remaining
term of less than one year, 5 to 10 years, and more than 10 years, and increase investment in bonds
with terms between 1 and 5 years. The bank is also adding the 1 to 3 year, and 3 to 5 year
classifications to the 1 to 5 year category, and the 10 to 25 years, and the 25 years or higher
classifications to the 10 years or higher category, further refining the categories of remaining terms forintended purchases of government bonds. Overall, the lower limit for monthly purchases has been
reduced to 680 billion yen (USD 6.2 billion) and the upper limit has been reduced to 1.2 trillion yen(USD 10.9 billion), but there is no change to the policy of spending 8 to 12 trillion yen (USD 72.8 to
109.1 billion). By introducing QQE with Negative Interest Rate and QQE with Yield Curve Control
policies, the BOJ appears to have shifted its attention to the policy rate, though the Bank has not yet
abandoned “quantity.”
According to the BOJ’s Flow of Funds Accounts, the balance of BOJ holdings in government
bonds and the Fiscal Investment and Loan Program (FILP) bonds was 344.2 trillion yen (USD 3.1
trillion) in June 2016 (Fig. 2-10). Looking at the balance of holdings by entity (Fig. 2-11), the BOJ
accounts for the highest ratio (35%), an increase from the same period in the previous year (30%).

http://www.jcer.or.jp/- 19 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 2-10 JGB Holdings by Entity
400(Trillion Yen)
Central bankFinancial institutions for small businesses
Pension funds

300

Domestic banks
Insurance
Overseas

200
100
0
00:1

01:1

02:1

03:1

04:1

05:1

06:1

07:1

08:1

09:1

10:1

11:1

12:1

13:1

14:1

(Quarterly)
16：2
16:1

15:1

Note: 1. “Financial institutions for small businesses” includes the Japan Post Bank.
2. JGB includes FILP (fiscal investment and loan program) bonds and excludes Treasury discount bills.
Source: Bank of Japan, Flow of Funds AccountFig. 2-11 Ratio of JGB Holdings by Entity (End of June 2016)
Households
1%

Agriculture, Forestry
and Fisheries financial
institutions 3% Pension funds 4%
Mutual aid insurance
4%
Overseas 6%

Central bank35%

Public pension 5%
Domestic banks 9%
Financial institutions forsmall businesses
11%

Insurance
22%

Note: 1. “Financial institutions for small businesses” includes the Japan Post Bank.
2. JGB includes FILP (fiscal investment and loan program) bonds and excludes Treasury discount bills.
Source: Bank of Japan, Flow of Funds AccountFor how long can the “quantitative” part of QQE continue? In Fig. 2-12-1, we trace the flow of
long-term government bond transactions. We verified the limits for bond purchases based on data for
September 2015 in Kimotsuki, Samikawa, and Takahashi (2016) which pointed out the limits will bereached in June 2017. For this report, we have updated the analysis using data available up to March2016. Other than reducing the amount of Japan Post Bank’s disposable government bonds to 34.3
trillion yen (USD 311.8 billion), the prerequisites concerning the conditions for bond holding ratios
etc are the same as in Kimotsuki et al. (2016).

http://www.jcer.or.jp/- 20 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 2-12-1 Flow of Long-Term JGBs

Fig. 2-12-2 JGBs Available for Sale (Mar 2016)
BOJ’s annual purchases ×N years=Net annual long-term JGB issuance ×N years+ Amount available for sale by the private sector
JGB holdings (End of Mar 2016)①Totalassets(Tril. yen)

②Total
JGB
holdings(Tril. yen)②/①
Ratio (%)

Banks
Japan Post BankLife insurance companies
Japan Post Insurance
Property insurance companies
Public pension funds

1,043.4
207.1
285.6
81.5
30.9
171.8

95.7
82.2
102.7
44.2
5.9
67.9

9
40
36
54
19
40

Total

1,820.3

398.6

22

JCER Assumptions
Shift in ratio（％）③Total JGB
holdings after
shift(Tril. yen)④
Supplementarymeasures②-③+④
JGBs available
for sale(Tril. yen)

5
―
36
34
18
35

52.2
47.9
102.7
27.7
5.6
60.1

11.7
0.0
0.0
0.0
0.0
0.0

55.2
34.3
0.0
16.5
0.3
7.8

296.2

11.7

114.1

Total

Source: Summary Reports released by banks and other financial institutions and their websites

We estimate that the amount of disposable long-term government debt held by private banks,
insurance companies, public pension funds, and other public financial institutions totals 114.1 trillion
yen (USD 1.0 trillion). In December 2015, the BOJ introduced supplementary measures that expanded
eligible collateral for its provision of credit, accepting foreign currency-denominated loans on deeds
and financial institutions' housing loans portfolio. The value of collateral is calculated by multiplying
the market value of the pledged asset or the outstanding principal amount by an assessment rate
(haircut rate) according to the remaining term or risk (Fig. 2-13). Taking the supplementary measures
into account, we calculate that the extra room for JGBs amounts to 11.7 trillion yen (USD 106.4
billion) as shown in Fig. 2-12-2.

http://www.jcer.or.jp/- 21 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Figure 2-13 BOJ Eligible Collateral and their Values (Haircut rate) as of September 2016
Applicable Rate of Collateral to Market Price (%)
Remaining
Maturity

JGBs

Up to 1 year
1 - 3 years
3 - 5 years
5 - 7 years
7 - 10 years
10 - 20 years
20 - 30 years
Over 30 years

99
99
99
98
98
97
96
94

Foreign bonds
Asset-backed bonds（converted to yen）
87
87
87
87
87
87
87
87

Applicable Rate of Collateral to Outstanding Principal Balance (%)
DollarTrust beneficiary
Government deed
denominatedinterests ofloans
Loans on Deeds
housing loans
96
97
88
91
95
80
85
90
70
75
85
65
60
70
80
55
―
―
―
―
―
―
―
―
―

Corporate deed
loans

97
97
97
96
96
95
94
92

Source: Bank of Japan, Eligible Collateral

According to our latest estimation, the limits to the BOJ’s JGB purchases will be reached insummer 2017. However, the amount of JGB purchases by the BOJ is based on their purchasing policy
as of September 2016. The BOJ’s JGB purchasing program was recently modified in October 2016,
resulting in a decline in JGB purchases that month. If JGBs are purchased at the same pace as in
October 2016, we find that the limit to BOJ’s purchases will be reached later, in fall 2017. On theother hand, with the introduction of BOJ’s fixed-rate purchase operation of JGBs under QQE with
Yield Curve Control, the BOJ’s JGB purchases may expand, in which case, purchasing limits will bereached earlier than estimated. In fact, on November 17, the Bank offered to buy unlimited amount of
JGBs with between one and five years left to maturity.
Will the BOJ continue to buy JGBs? Banks and the Japan Post Bank hold abundant disposable
government bonds, and if they disposed of all of them, they would have the cash equivalent at hand.
They are likely to keep deposits in Policy Rate Balance of the BOJ current accounts where negative
rate applies. This could badly effect on Japan’s financial system. There may be some investment
options, including regional revitalization funds, PFI projects, and overseas infrastructure funds.
However, their current scale seems insufficient for investing all the funds received from the sale of
JGBs. Thus, there is a risk of reluctance among private financial institutions and investors to sell their
JGBs to the BOJ, to avoid increasing the Policy Rate Balance, which may have an adverse impact on
their profits. The higher the prices of JGB purchases, the larger the loss incurred by the BOJ will
become.

http://www.jcer.or.jp/- 22 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

BOJ’s Foreign-Bond Purchases
At present, the BOJ is buying long-term government debt, ETFs, J-REIT, corporate bonds, andcommercial paper (CP). Even as the BOJ continues to buy large quantities of these securities, a debate has
surfaced about whether foreign government bonds should be included among the buying options.
According to Koichi Hamada, Special Advisor to the Cabinet, “buying foreign government bonds is an
option for the BOJ if it is difficult for the government to intervene in the market amid the ongoing pressureof the high yen on the currency markets”. Kazumasa Iwata, President of JCER, has also been proposing thecreation of a 50 trillion yen (USD 454.5 billion) fund to buy foreign bonds, in the wake of a financial crisis.
The purchase of foreign government bonds has also been discussed at past Monetary Policy Meetings. It
started at the Monetary Policy Meeting on October 11 and 12 in 2001 when Nobuyuki Nakahara, then apolicy board member, observed that the Bank should consider buying foreign government bonds as a
backup for buying JGBs. At the Monetary Policy Meeting on November 15 and 16, 2001, there was aformal proposal to “start to buy foreign government bonds as soon as the preparations for the practicalsystems are in place in case it is judged necessary to ensure smooth operations”. At the time, a prolonged
deflation was expected, and since it was highly likely that further monetary easing would take place in the
future, the proposal was based on awareness of the need to increase the means of supplying funds. The
objectives of buying foreign government bonds are (1) to increase the capacity for supplying funds(monetary base), and (2) to diversify the means of supplying funds at the BOJ. A method of making
constant purchases of foreign government bonds for a fixed sum every month was proposed to make it
clear that the purpose was not the foreign exchange intervention.
The Bank of Japan Act poses problems when buying foreign government bonds. The following are two
excerpts from the Bank of Japan Act on the purchase of foreign government bonds and partial statements
by board members at the time.
Policy board member Miyako Suda insisted that “the purpose of monetary policy is not to stabilize thecurrency value, including the exchange rate, but to stabilize prices which are the internal value of thecurrency. If the BOJ buys foreign currency and foreign debt as part of monetary adjustment, an essentialcondition is that there is no impact on the exchange rate, or at least no intention. Even if the exchange rate
moves toward yen depreciation more than expected, we need to have the resolve to continue buying foreigndebt”.
Article 33 of the Bank of Japan Act: In order to achieve the purpose prescribed in Article 1, the Bank ofJapan may conduct the following business: [….] (iii) Buying and selling of commercial bills and othernegotiable instruments (including those drawn by the Bank of Japan in this item), national government
securities and other bonds, or electronically recorded claims;
Board member Nobuyuki Nakahara: Article 33 includes “national government securities and otherbonds” in day-to-day business. Of course, this includes foreign government bonds, so if there is a need tobuy and sell foreign debt in order to supply yen as part of normal business, this is clearly possible.
At the Monetary Policy Meeting at the time, the following points were cited as the advantages ofbuying foreign debt: (1) Ease of providing current deposits since there is low substitution with other basemoney than government bonds; (2) Unlike increasing operational funds to buy long-term government
bonds, there is no risk of exciting fears around fiscal discipline among market participants; (3) It is easierto secure neutrality compared to purchases of shares and corporate bonds. On the other hand, there werealso concerns about the need to buy foreign debt, and whether the currency authorities in the United States

http://www.jcer.or.jp/- 23 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

and neighboring countries would fully understand the situation.
Article40 (1) of the Bank of Japan Act states;“The Bank of Japan may, when necessary, buy and sell foreign exchange on its own account or as an agent
handling national government affairs pursuant to Article 36, paragraph 1, and it may also buy and sellforeign exchange on behalf of foreign central banks, etc. (foreign central banks and those equivalent
thereto; the same shall apply hereinafter) or international institutions (international institutions of which
Japan has a membership, including the Bank for International Settlements; the same shall apply
hereinafter) as their agent in order to cooperate with them as the central bank of Japan.”
The argument arose to whether the BOJ purchase should invade Article40 (2) of the Act which states asfollows;“The Bank of Japan shall buy and sell foreign exchange as an agent handling national government affairs
pursuant to Article 36, paragraph 1, when the purpose of the buying and selling is to stabilize the exchange
rate of Japanese currency.”
Nakahara insisted that even if the BOJ bought foreign government bonds as part of monetaryadjustment, there would have been no impact on the exchange rate, so long as it was not intended as
foreign exchange intervention. The proposal to buy foreign government bonds continued until March 2002,
and since then there have been no discussions of buying foreign debt for a long time.
Currently, with the approaching limits on BOJ purchases of JGBs, there is once again some leeway to
discuss the purchase of foreign government bonds.

http://www.jcer.or.jp/- 24 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

3. How will BOJ bear Potential Losses?
As argued in Part 2 of this report, the BOJ is now criticized as being another “whale in the pond” inthe ETF market. ETFs have risk for a loss of principal, which might damage the soundness of the BOJ’sbalance sheet. The fluctuations of stock prices as well as foreign exchange rate of the yen might havelarger effect on the profits and losses of the Bank. It will also be difficult for the central bank to shrink
its balance sheet in its “exit” phase, without exerting a negative impact on the market and incurring
heavy losses that lead to national burden. Coordination between the government’s debt management
policy and the Bank’s monetary policy needs to be taken into account.

3-1. Under what Circumstances will BOJ fall into the red?
BOJ prepares for Loss incurred in Exit Phase
According to the BOJ income statement and operating report for FY2015, the interest fromlong-term government bonds was 1.3 trillion yen (USD 11.8 billion), accounting for approximately
82% of ordinary revenue at the BOJ. This tells us that the BOJ earns most of its profit from theinterest from long-term government bonds. On the other hand, of the operating expenses amounting to834.5 billion yen (USD 7.6 billion), approximately 49% was foreign exchange losses (408.3 billion
yen; USD 3.7 billion), and approximately 27% net interest payments on excess reserves (221.6 billion
yen; UDS 2.0 billion). Fig. 3-1 presents fluctuations in operating profits and legal reserves at the BOJ.
In FY2015, operating profits at the BOJ declined by as much as 55% YoY. The main reason was that
foreign exchange related profit/loss was converted to losses due to the appreciation of the yen.
Consequently, if the yen appreciates further, or the ETF market shrinks, there is potential for operating
profit at the BOJ to fall.
Fig. 3-1 Legal reserves of BOJ

Note: Net income = Operating profits - (Special losses - Taxes (Provision for corporate income tax, inhabitants taxes, andenterprise taxes))
Source; BOJ, Financial Statements

http://www.jcer.or.jp/- 25 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

The BOJ sets aside as legal reserve funds a sizeable 5% of the current term surplus based on final
profits. Looking at the fluctuations in the legal reserve funds presented in Fig. 3-1, 20% of the surplus
in FY2013 when QQE was introduced, and 25% in the following fiscal year, were set aside as legal
reserve funds. In FY2015, only 5% of the current surplus was recorded as legal reserve fund.
As of the FY2015 settlement of accounts, the BOJ revised the provisions system to facilitate thetransfer of approximately 50% of the difference between the interest rate paid on excess reservebalances and the interest income from the government bond holdings to the transfer, providing forpossible losses on bond transactions. In FY2015, the BOJ set aside 450.1 billion yen (USD 2.0 billion)
as transfer to provision for possible losses on bonds transactions. As long as the BOJ operates in sucha way that the equity ratio does not fall below 8%, the bank can freely break into the provisions forlosses on bond transactions (BOJ Accounting Rules Article 18-1). This allows for a high degree of
freedom compared to the legal reserve funds, which cannot be withdrawn unless a loss (deficit) arises,
and for the BOJ it is a useful way of maintaining fiscal soundness. However, since the BOJ equity
ratio was 8.05% at the end of FY2015, it must be noted that the actual degree of freedom under thecurrent circumstances is low.
Interest paid on Excess Reserve becomes Heavy Burden
In FY2015, BOJ net assets including legal reserve funds and provisions for loss on bondtransaction was 7.4 trillion yen (USD 67.3 billion). Has the BOJ accumulated sufficient funds relative
to the losses that would occur at the time of a future exit?
The bank offers 0.1% interest on reserves exceeding the legally mandated reserves held in BOJ
current accounts. Since the introduction of NIRP, the BOJ has divided its current accounts into threetiers with an interest rate of 0.1% applicable to the balance at the first tier, the basic balance, which
has been unchanged at approximately 210 trillion yen (USD 1.9 trillion). In FY2015, the amount ofinterest that the BOJ paid to financial institutions totaled 221.6 billion yen (USD 2.0 trillion),increasing by approximately five times compared to FY2012, the year before the introduction of QQE.
Fig. 3-2 presents the fluctuations in BOJ’s monetary base. Since the introduction of QQE in April
2013, the monetary base has expanded with a focus on BOJ current accounts. In FY2013 ending
March 2014, the BOJ current account balance increased by 59.8 trillion yen (USD 0.5 trillion) overthe previous year; in FY2014 it was up by 71.6 trillion yen (USD 0.7 trillion), and in FY2015 by 74.9
trillion yen (USD 0.7 trillion).

http://www.jcer.or.jp/- 26 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 3-2 BOJ’s Monetary Base
450 （Trillion yen）
Current Account Balances
400
Coins in Circulation
350
Banknotes in Circulation
300
250
200
150
100
50
0
07/01
08/01
09/01
10/01

NIRP
Expansion of QQE
QQE（Monthly）
11/01

12/01

13/01

14/01

15/01

16/01

16/10

Note: Monetary base = Banknotes in Circulation + Coins in Circulation + Current Account Balances (Current AccountDeposits in the BOJ).
Source: BOJ, Monetary Base and the BOJ’s Transactions

The Bank can enjoy the benefits of receiving interest from its JGB holdings while keeping interest
payments on the Basic Balance of current account constant. On the other hand, when inflation rate
exceeds the 2% target and monetary policy enters the “exit” phase, it is conceivable that the BOJ will
hike the policy rate. The interest rates on JGBs which the Bank hold are fixed and will remain as low
as they were during the period of low interest even if they have to raise the policy rate. As of the endof FY2015, excess reserves are approximately 230 trillion yen. If interest were raised to 2% due toprices reaching the 2% target, the BOJ would pay 4,600 billion yen (USD 41.9 billion) in interest to
financial institutions relative to the excess reserves at the end of FY2015.
If we assume that an annual pace of increase of excess reserve in the current account balance at the
BOJ is 70 trillion yen (USD 0.6 trillion) and the interest on excess reserves is raised to 2% as the exit
phase nears during FY2018, the BOJ will be saddled with an additional 8.8 trillion yen (USD 0.1
trillion). In FY2015, operating profits at the BOJ was 762.6 billion yen (USD 6.9 billion); even in
FY2014, a robust year, operating profits was 1.7 trillion yen (USD 15.5 billion). Consequently, theBOJ would post a loss of approximately 7.1 trillion yen (USD 64.5 billion) at the end of FY2018 even
if the interest were subtracted from ordinary income for FY2014, a robust year. Such loss is close to
the BOJ net assets of 7.4 trillion yen (USD 67.3 billion), which includes legally mandated reserves,transfer to provision for possible losses on bond transactions, and other account reserves. Therefore, itcannot be said that the BOJ is adequately prepared for losses occurring in the exit phase, and it is amatter of urgency that the BOJ undertakes further preparation for its exit strategy.

3-2. Fiscal Dominance and Monetary DominanceJapan’s Monetary Policy: Fiscal or Monetary Dominance?
Japan’s outstanding debt as a percentage of GDP is forecast to be 233.1% in CY2016. This is anextremely large proportion even when compared to major countries (Fig. 3-3). A low interest rate

http://www.jcer.or.jp/- 27 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016environment will incentivize the government to issue long-term government bonds. Is the reason foreasing the monetary policy to stabilize prices or to control the cost of interest payments incurred bygovernment? Since easing monetary policy will have an effect on both points (an unintentional effecton the latter), it is difficult to draw clear lines.
Fig. 3-3 General Government Gross Financial Liabilities（% of Nominal GDP）
Japan
Germany
200
Canada250

United States
FranceGreeceUnited Kingdom
Italy

150
100
50
（CY）

0
2001

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

Source: OECD, Economic Outlook No.99 (June 2016）

The BOJ is lowering interest rates to achieve the 2% price target. On the other hand, it is possible
to control the cost of interest payments if debt is issued in a low interest environment. Fiscal
dominance is a situation where the independence of the central bank fades and the fiscal conduct of
the government influences monetary policy, having an impact on prices. As a result of analyzing
government debt in twenty advanced economies, Greenlaw, Hamilton, Hooper and Mishkin (2013)
found that monetary easing is a contributing factor when the government and parliament are acting
appropriately toward sound public finances. However, in the reverse case, monetary policy isdominated by fiscal policy (fiscal dominance). In other words, whether or not the government takes
appropriate measures toward sound public finances is the watershed between fiscal dominance andmonetary dominance.
Fig. 3-4 shows the fluctuations in Japan’s primary balance. The primary balance in Japan has been
improving since the collapse of Lehman Brothers, and has continued to improve since 2013 when the
BOJ introduced QQE. Consequently, we can say that there is no fiscal dominance over monetary
policy.

http://www.jcer.or.jp/- 28 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 3-4 Transition of General Government Primary Net Lending/Borrowing in Japan
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50

(Trillion yen)
IMF Forecast

General government primary net
lending/borrowing

(CY)
2001

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

Source: IMF, World Economic Outlook Database (October 2016)

Greenlaw et al. (2013) also indicate that countries with government debt ratio exceeding 80%
recording a current account balance deficit, run a high risk of falling into fiscal dominance. Although
Japan’s government debt ratio is far in excess of 80%, Japan runs a current account surplus, so theindication does not apply in this case. However, if fiscal dominance arises, it is conceivable that
confidence in the currency will disappear and hyper-inflation might develop. In order for Japan to
avoid such a situation, the government must make every effort to improve the primary balance, and toachieve a primary balance surplus.
Canada’s Case of Monetary Financing – Was it a success?
Although fiscal dominance is regarded as being likely cause hyper-inflation, there is a case in
Canada where fiscal dominance based on clear rule had contributed to getting over from deflation.
Between 1935 and 1975, the Bank of Canada implemented monetary finance by directly purchasing
government bonds from the Canadian Government. The context was the government’s goal of
securing funding for the Second World War and the postwar recovery. Fig. 3-5 presents therelationship between the consumer price index and the monetary financing ratio (MFR), i.e. theproportion of total public debt held by the Bank of Canada. As a result of monetary financing, theconsumer price index, which had been close to 0% in the early 1950s, recovered to close to 5% in thelate 1960s. Since the introduction of inflation targeting in 1991, fluctuations in the consumer priceindex have been relatively small.

http://www.jcer.or.jp/- 29 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Fig. 3-5 Monetary financing and inflation in Canada
Inflation Targeting

（%）

30

Monetary Financing Ratio

25

Consumer Prices (2010 base, YoY)

20
15
10
5
0
-5

（Quarterly）
16:3
46:1 50:1 54:1 58:1 62:1 66:1 70:1 74:1 78:1 82:1 86:1 90:1 94:1 98:1 02:1 06:1 10:1 14:1

Note: 1. Monetary financing ratio is the proportion of total public debt held by the Bank of Canada or government.
2. The shadowed area indicates the period of monetary financing in Canada (1935-75).
Source: CANSIM, OECD, Ryan-Collins (2015)

Ryan-Collins (2015) indicates that the example of Canada is not one of inducing hyperinflation;rather it has had a positive influence on early withdrawal from deflation. However, Canada sufferedfrom high inflation as of the mid-1970s. As a result, Canada adopted monetary targeting, which
reduced MFR from approximately 20% in 1980 to approximately 9% in 1985, and as a result theconsumer price index also declined. In 1991, inflation targeting was introduced. As a factor leading to
the introduction of inflation targeting in Canada, Ito and Hayashi (2006) cite a rapid increase in
outstanding government debt as of the 1980s (Fig. 3-6), and a loss of confidence in the ability of thegovernment and the central bank to manage macroeconomic policy due to the relatively high inflationthat continued for a long time. Since introducing inflation targeting, Canada has kept the rate of
inflation within a range of approximately 1-3%.
Fig. 3-6 General Government Gross Financial Liabilities in Canada
120
110
100
90
80
70
60
50
40

（% of Nominal GDP）

（CY）
70

72

74

76 78

80

82

84 86

88

90 92

94

96

98 00

02

04 06

08

10

12 14

16

Source: OECD, Economic Outlook No.99 （June 2016）

http://www.jcer.or.jp/- 30 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Should Japan, a country suffering from long-term deflation, do what Canada has done and consider
monetary finance? In Japan, direct placement of government bonds by the BOJ is, in principle,
prohibited under Article 5 of the Public Finance Act5. The reason is that once the central bank starts tofinance the government by underwriting government bonds, the government loses fiscal discipline,
eventually running the risk of causing virulent inflation because the government is unable to apply thebrakes to increases in the money supply at the central bank.
Fig. 3-7 presents the relationship between the consumer price index and the ratio of JGBs held by
the BOJ among total outstanding JGBs. Since the introduction of QQE in 2013, the ratio ofgovernment bonds held by the BOJ has risen. On the other hand, growth in the consumer price index
has not only slowed, but also even been in periods of decline. This indicates that there is nocorrelation between trends in the consumer price index and the ratio of government bond holdings at
the BOJ during the entire period.
Fig. 3-7 JGB holdings rate and Consumer Price Index in Japan
40
35
30

(%)

Inflation Targeting(YoY, %)JGB Holdings Rate
Core Core CPI (RHS)

4
3
2

25

1

20

0

15

-1

10

-2

5

(Quarterly)

0

-3
-4

16：3
98:1 99:1 00:1 01:1 02:1 03:1 04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1

Note: Core Core CPI = All items less food (less alcoholic beverages) and energy. Data excludes effects of the consumption
tax hike.
Source: BOJ, Japan’s Flow of Funds Accounts; MIAC, Consumer Price Index

At present, the BOJ is buying JGBs issued on the market at a higher price than the original issuanceprice. This increases the BOJ amortization burden and reduces the net interest receipt from JGBs. The
BOJ losses reduce the government revenue in the shape of a decrease in the BOJ’s remittance to thenational treasury.
In Canada, direct underwriting by the central bank is recognized in two adjacent provisions in the
Bank of Canada Act. One provision recognizes direct underwriting of government bonds by thecentral bank, and the other stating that in case direct underwriting of government bonds exceeds one
third of the estimated government revenue, such loans shall be repaid before the end of the first5

However, where the BOJ holds government bonds as a result of monetary control, the bonds that are nearing redemption
can be refinanced by the state, but only within the amount approved by Diet resolution based on the proviso to Article 5 of
the Public Finance Act.

http://www.jcer.or.jp/- 31 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

quarter of the following fiscal year6. Is moderate monetary financing an option in Japan?
3-3. Government Bond Management Policy and Monetary Policy
Some argue that price fluctuations occur as a result of fiscal policy, specifically the quantity ofoutstanding government bonds, and that the money supply has less impact.
The amount of outstanding public debt has continued to increase (Fig.3-8). Social welfare costs,
which account for a third of annual supply expenditures, have risen each year, and estimated to exceed
20 trillion yen (USD 0.2 trillion) for the first time in FY2016. Furthermore, according to MOF
estimates, the amount of outstanding public debt will reach to 1,030 trillion yen (USD 9.4 trillion) at
the end of FY2025.
Fig. 3-8 Outstanding Public Debt and Interest Paid
900
750

（Trillion yen）

（Trillion yen）
838 12

Outstanding Public Debt

10Interest Paid (RHS)

600

9.9

8

450

6

300

4

150

2

0
1975 77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13

0
15 16（FY）

Note: 1. Amount of outstanding bonds = FY15: Estimates, FY16: Budget.
2. Interest paid = FY15: Revised budget, FY16: Budget.
3. The Ministry of Finance provisionally calculates the 10-year government bond yield for FY2016 at 1.6%. This isbecause that MOF estimated the rate higher to think the case the rate rise up rapidly.
Source: MOF, Documents regarding the Tax system and Finance in Japan

MOF preliminary calculations show that the cost of interest payments on government bonds isestimated to be 21.9 trillion yen (USD 0.2 trillion) in FY2025, or 2 times the figure for FY2016. The
cost of interest rate payments will increase substantially when interest rates rise in the future.
According to the “Preliminary Calculations on the Impact of the FY2016 Budget on Annual
Expenditure and Revenue in the Future” announced by the MOF in February 2016, a fluctuation of
1% in the interest on 10-year bonds would cause debt-servicing costs to increase or decrease by 6
trillion yen (USD 54.5 billion) in FY2021. The average interest rate on the outstanding JGBs is

6

Bank of Canada Act
18 The Bank may…
(i) make loans or advances for periods not exceeding six months to the Government of Canada or the government of aprovince on taking security in readily marketable securities issued or guaranteed by Canada or any province;(j) make loans to the Government of Canada or the government of any province, but such loans outstanding at any one timeshall not, in the case of the Government of Canada, exceed one-third of the estimated revenue of the Government of Canada
for its fiscal year…and such loans shall be repaid before the end of the first quarter after the end of the fiscal year of thegovernment that has contracted the loan;

http://www.jcer.or.jp/- 32 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

currently 1.1% (Fig.3-9). In case of a future rise in the interest rates for government bonds due tosome shock, such as a downgrading of the Japanese government bonds, or a move towards an exit
policy by BOJ, the cost of servicing the debt will greatly increase, leading to an increase in annual
expenditure.
Fig. 3-9 Interest on the Amount of Outstanding Bonds
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

（％）

1.1
（FY）
1975 77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

1314

11

Source: MOF, Documents regarding the Tax system and Finance in Japan

Fig. 3-10 shows that an increase in outstanding public debt is always a factor that pushes up thecost of interest payments. There is high possibility that outstanding public debt will rise up, andinterest rates may also rise over time. Therefore, it is necessary to consider how to manage fiscal
administration, including management policies for government bonds, in order to enhance fiscal
sustainability.
Fig. 3-10 Decomposition Analysis of Interest Paid
70
60
50
40
30
20
10
0
-10
-20

(%)
Interest rate
Amount of outstanding Bonds
Interest Paid

(FY)1976 78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

16

Note: 1. Amount of outstanding bonds = FY15: Estimates, FY16: Budget.
2. Interest paid = FY15: Revised budget, FY16: Budget.
Source: MOF, Documents regarding the Tax system and Finance in Japan

In Japan, a pattern of large government bond holdings continues with outstanding government
bonds, including fiscal investment and loan bonds, reaching 901.5 trillion yen (USD 8.2 trillion) at theend of FY2015. In order to convert outstanding government bonds in a stable manner, government
bond management policies have been implemented to reduce the issuance of refunding bonds by

http://www.jcer.or.jp/- 33 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

extending the average redemption term for new bond issuance. As a result, the average redemption
term for government bonds has been increasing since FY1999, to reach nine years and two months by
FY2016 as shown in Fig. 3-11.
Fig. 3-11 Average Redemption Periods of JGBs issued each Year (based on Annual JGB Issuance)
10（Years）

98

9years 2months

7

4years10months

6
5

（FY）

4
97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

Source: MOF, Debt Management Report

In addition, the scheduled amount of JGB issuance for FY2016 decreased by 5,200 billion yen(USD 47.3 billion) to 147 trillion yen (USD 1.3 trillion) compared to early FY2015 (Fig. 3-12). The
government bond issuance plan for FY2016 includes initiatives aimed at securing liquidity in thegovernment bond market, and reducing government bond procurement costs. Looking at the
breakdown of government bond issuance in FY2016, the decrease in short and medium term bonds (5,2, and 1 year bonds) was reduced while super-long bonds (40, 30, and 20 year bonds) saw an increasein 40 year bonds and a reduction in 20-year bonds, bearing in mind market needs. There is also theimpact of low interest rates, but the overall picture is of an increase in issuing government bonds withlonger terms including super-long bonds issued on an annual basis of 20 trillion yen (USD 0.2
trillion).
Fig. 3-12 JGB Market Issuance
180
160
140
120
100
80
60
40
20
0

（Trillion yen）
Liquidity supply bids

CMT, JGBi

11 years~

10 years

2 to 3 years~1year

（FY）
2008

09

10

11

12

13

14

15
(Revised)

16(Revised)

Source: MOF, Material for Advisory Councils on Government Debt Management

The average redemption period for government bonds have become longer in other major

http://www.jcer.or.jp/- 34 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

countries too (Fig. 3-13). The basic objectives of government bond management policy in thesecountries are also similar to Japan: suppress procurement costs in the medium to long term whileconsidering risk. In recent years, in particular, measures have been taken to increase liquidity in thegovernment bond market and to apply strengthen financial regulation with the UK increasing thefrequency of auctions and reducing the issuance per auction.
Fig. 3-13 International Comparison of the Average Redemption Periods of Government Bonds
18（Years）

16
14

Japan

USA

Germany

France

UK

12
10
8
6

（FY）

4
97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

Source: MOF, Material for Advisory Councils on Government Debt Management

http://www.jcer.or.jp/- 35 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

Conclusion
The government needs to manage its financing without low interest rate by NIRP. Moreover, as
analyzed in Iwata et al. (2014), if the government issue longer maturity of JGBs the effect of monetary
policy may be vanished. Thus, to revitalize Japan’s economy, fiscal policy needs to cooperate with
monetary policy although it is also important to keep their dependence.
In this report, we have outlined the series of unconventional monetary policies that the BOJ has
introduced since the late 1990s. The BOJ has long been struggling to get out of deflation; however,
CPI data shows that it will require substantial time for the Bank to attain its 2% inflation target. The
BOJ will therefore be forced to continue buying large-scale JGBs and other assets, even though it
shifted its numerical target from the amount of supply of monetary base to the policy rate. It is now
criticized as being the “whale in the pond” in the ETF market, not to mention JGB market. ETFs havethe risk for a loss of principal, which might damage the soundness of the BOJ’s balance sheet. The
fluctuations of Japan’s stock prices, as well as the yen exchange rate can have larger effect on profits
and losses of the Bank. In addition, it will be difficult for the central bank to shrink its balance sheet inthe “exit” phase, without exerting a negative impact on the market and incurring heavy losses that leadto national burden. It may thus be the time to consider the cooperation between the government andthe BOJ.

Copyright © 2016 JCER______________________________________________________________________________________
Japan Center for Economic Research (JCER)
Nikkei Inc. Bldg. 11F 1-3-7 Otemachi, Chiyoda-ku, Tokyo 100-8066, Japan
Phone: +81-3-6256-7710 / FAX: +81-3-6256-7924

http://www.jcer.or.jp/- 36 -

Japan Center for Economic Research
Financial Research Team

November 28, 2016

<Reference>
Iwata, K., & Fueda-Samikawa, I. (2013). Quantitative and Qualitative Monetary Easing Effects andAssociated Risks. Japan Financial Report No.25, JCER.
http://www.jcer.or.jp/eng/pdf/kinyu20131213.pdf
Iwata, K., Fueda-Samikawa, I., Takahashi, E. (2016). “Risks and Challenges for BOJ after breaking
through ZLB - Accelerate move toward establishing a "Cashless Society"” QQE with a
Negative Interest Rate: Follow-up Report. Japan Financial Report No.30, JCER.
https://www.jcer.or.jp/eng/pdf/160413_report.pdf
Iwata, K., Fueda-Samikawa, I., Takahashi, E., & Kimotsuki, T. (2016). “Risks from Extending the
QQE Policy — Bank of Japan’s JGB Purchases to reach Limits in June 2017” QQE
Supplementary Measures: Follow-up Report. Japan Financial Report No.30, JCER.
https://www.jcer.or.jp/eng/pdf/160127_fin_report2.pdf
Ryan-Collins, J. (2015). “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy,
1935–75” Working Paper No. 848 Levy Economics Institute.
http://www.levyinstitute.org/pubs/wp_848.pdf

Originally in Japanese
Iwata, K., Fueda-Samikawa, I., Kikuchi, K., & Hariu, N. (2015). Was Monetary Policy affective under
the ZLB? Possibility that Decline in Natural Rate of Interest caused Prolonged Tightening.
Japan Center for Economic Research, FY2014 Financial Research Report 5.
http://www.jcer.or.jp/report/finance/detail4856.html
Iwata, K., & Japan Center for Economic Research. (2014). Quantitative and Qualitative Monetary
Easing – Reviewing Policy Effects and Risks. Nikkei Publishing Inc.

http://www.jcer.or.jp/- 37 -