BOJ ‘normalization’ rides on fiscal consolidation

Governor Haruhiko Kuroda in 2016

As central banks start unwinding their balance sheets later this year, there is growing concern about the financial soundness of the Bank of Japan. Tetsuya Inoue, an economist auditing the BOJ for government bureaucrats, says those who worry about BOJ finances miss the main point: Of much greater concern is the need to bring fiscal deficits under control. Monetary policy, he suggests, must support fiscal consolidation.

Inoue is General Manager and Chief Researcher at Nomura Research Institute, an economic think tank. Before joining NRI in 2008, he was an executive staff member of the BOJ’s Policy Board.

The BOJ already owns 41% of the JGB market and 56% of the Japanese exchange-traded fund (ETF) market, assets worth a combined ¥490tn ($4.4tn). To buy more assets, it must bid up prices. This exposes the central bank to potential losses, especially to capital losses on its JGB holdings. Speaking before parliament, Governor Kuroda explained that a one percentage point rise in long-term yields would cause ¥23tn of BOJ losses. Politicians, investors, and academics, worry monetary policy normalization could bankrupt an undercapitalized BOJ… continue reading at The Japan Times.

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