The Bank of Japan said Wednesday its appraisal loss on government bond holdings widened to a record 9.43 trillion yen ($60 billion) at the end of fiscal 2023, affected by rising yields as the central bank gradually moved away from unorthodox monetary easing.
Aggressive buying of bonds and other assets has formed a key pillar of the BOJ's monetary policy to help Japan end its fight with deflation. Higher share prices, meanwhile, led the bank to see its unrealized profit from exchange-traded funds that are linked to the prices more than double from a year earlier to a record 37.31 trillion yen.
In March, the BOJ went ahead with its first interest rate hike in 17 years amid growing confidence in the attainment of its 2 percent inflation target. It also ended its program to keep borrowing costs extremely low through aggressive bond buying and purchases of ETFs.
The BOJ's total assets swelled to their biggest-ever 756.42 trillion yen, compared with 735.12 trillion yen at the end of fiscal 2022, the remnant of powerful monetary easing under Haruhiko Kuroda, a former governor of the bank.
The total was far bigger than the size of the Japanese economy, which was just shy of 600 trillion yen in nominal terms. The BOJ's bloated balance sheet could pose a challenge to the central bank when it normalizes monetary policy.
Even before the major policy shift in March, the BOJ gradually loosened its control on long-term yields, allowing them to rise above its previous ceiling of 1.0 percent. As bond yields move inversely to prices, higher yields reduce the value of the BOJ's holdings.
The unrealized loss widened from 157.1 billion yen a year earlier. The bank's total bond holdings were valued at 580.23 trillion yen, compared with 589.66 trillion yen in book value.
The BOJ makes a point of holding bonds until maturity, meaning that an unrealized loss does not immediately affect its finances.
While the yield cap program ended, the BOJ has been buying government bonds to prevent a surge in yields, bringing into focus when it will trim its buying.
The benchmark 10-year yield has been rising sharply in recent days to its highest levels in over a decade, partly because of expectations that additional rate hikes are in the offing.
The market value of ETFs came to 74.50 trillion yen, bigger than the book value of 37.19 trillion yen, benefiting from higher Japanese stock prices. At the end of March, the benchmark Nikkei index jumped 44 percent over the past year.
