MNI POLICY: BOJ To Feel Way To Appropriate Balance Sheet Level

The Bank of Japan is likely to feel its way to determining an appropriate level for its balance sheet as it wind downs its government bond holdings, though early ideas include gradually lowering its current account balance to between JPY200 trillion and JPY300 trillion from the current JPY518 trillion, MNI understands.

At its last meeting the BOJ decided to reduce the pace of bond tapering to JPY200 billion per quarter from JPY400 billion starting in April 2026, a pace which would eventually take its holdings to about JPY200 trillion, according to one simulation.

Maintaining its tapering at JPY400 billion per quarter would take holdings to about JPY100 trillion, which officials consider as probably too low, and likely to increase bond market volatility. (See MNI POLICY: BOJ Sees Bond Sell-Off As Reflecting Market)

ALERT AS BALANCE REDUCED

As it slowly reduces its balance sheet, the BOJ will be alert to any problems such as delays in settlements or increases in interest rates, particularly as the balance reaches the territory of JPY200-JPY300 trillion. While the appropriate balance level is unknown, officials consider that it should contain a certain proportion of JGBs, though the BOJ could consider taking on other assets, such as loans, as bond holdings are reduced.

Given a balance of banknotes of JPY117 trillion as of July 14, and banks’ required reserves of about JPY12 trillion, a current account balance of between JPY200 trillion and JPY300 trillion seems reasonable, according to officials’ initial calculations, though they stress that the level of banks’ desired excess reserves remains to be established.

The view is broadly shared by bank officials that the BOJ’s JGB holdings remain very large. (See MNI POLICY: BOJ Mindful Of Overreaction To JGB Stock-Effect)