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Bank of Japan's bond runoff supplied 92% of its September-quarter shrinkage
Bank of Japan's government bond holdings fell 14.3 trillion yen last quarter, 92% of a 15.5 trillion yen drop that left assets 17.4% below their 2024 peak. With loan repayments stalled, its tightening now comes almost entirely from bonds maturing off the books.
The Investor · Invest desk
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What happened
- Total assets ended September at 625 trillion yen, down 70.8 trillion yen from a year earlier and the lowest level since March 2020.
- That bond decline was the largest quarterly drop since the bank began QT, leaving its JGB holdings at 504 trillion yen, also the lowest since March 2020.
- Since its first hike in March 2024, the bank has raised its policy rate to 1.25%, the highest in 31 years.
- The Federal Reserve started QT about two years before the BOJ and stopped nearly a year ago, while the BOJ is still shrinking its holdings.
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Why it matters
- constraint With Treasury bills gone and loan balances flat, any further shrinkage has to come out of JGBs or out of a stock portfolio the bank is selling very slowly.
- exposure With the Fed no longer running QT, holders of JGBs absorb central-bank runoff that Treasury holders do not, and at the BOJ's fastest quarterly bond pace so far.
- decision If the yen keeps falling while bond runoff runs at a record pace, the bank is left with faster rate hikes, the tool it has used most sparingly.
Measured from their separate peaks, the bank's loans have shrunk almost as much as its bonds. Loans are down 83.1 trillion yen since early 2022, a 55% fall [11], and government securities are down 88.2 trillion yen since 2023 [9]. Repayments therefore equal about 94% of the bond decline [17]. A repaid loan shrinks the balance sheet without changing how many bonds private investors have to hold. The cumulative drop since the 2024 peak [3] mixes the two channels. The latest quarter separates them: loans held at about 68 trillion yen after a plunge in the prior quarter [10], and bond runoff accounted for nearly all of the fall in assets [18].
Wolf Richter, who compiled the figures from the BOJ's balance sheet [1], wrote that the bank "is using QT as primary tool to prop up the yen and deal with inflation that has been flourishing in Japan" [23]. Of the rate hikes, he wrote: "It shows how stuck the BOJ has been on free money, and it seems the only reason it is hiking at all is to keep the yen from collapsing further" [22]. The bond market fits the QT half of that. The 10-year JGB yields 3.09%, up from negative in 2020, and the 30-year yields 4.21% [6]. Those are 1.84 and 2.96 percentage points above the policy rate [19][20].
Richter's piece does not include a yen exchange rate or an estimate of how much of the yield rise comes from runoff, so the step from a smaller balance sheet to a firmer currency is his inference. The article's headline calls the yen plunging [24]. The numbers fit more than one outcome. Runoff could keep lifting long yields until the yen steadies without faster hikes, and Richter would be right. The 30-year could climb far enough past 4.21% [6] that the bank slows runoff. Or the yen could keep sliding through a record pace of bond runoff [7], and the primary-tool claim would fail on its own evidence.
I think the quarter supports a narrower claim: the BOJ's balance-sheet tightening now runs almost entirely through bonds, the part of QT Richter calls "impactful on long-term yields" [25]. Whether that defends the yen is unproven on this record. Another quarter of JGB runoff near 14 trillion yen with the yen still weakening would count against it.
The stock portfolio barely moves. The bank sold 90 billion yen of ETFs and J-REITs in the quarter, measured at acquisition cost [13], about 0.6% of the quarter's bond runoff [21]. Those funds never mature, so the only way out is to sell them outright [12]. They are carried at what the bank paid, starting in 2011. The Nikkei 225 is up about 500% since then, so the market value of each sale is several times the book figure, Richter wrote [14]. Combined holdings of ETFs, J-REITs and bank stocks are 1.3% below their peak [15]. Selling the last of the bank stocks took nearly 10 years [16].
What to watch
- The BOJ's December-quarter balance sheet, and whether JGB holdings fall by more or less than this quarter's 14.3 trillion yen now that loan balances have stopped falling.
- Any increase in ETF and J-REIT sales from 90 billion yen a quarter at book value, the only holdings the bank has to sell outright.
- The 30-year JGB yield against 4.21% in any quarter when bond runoff slows; a continued rise would point to drivers other than the BOJ's holdings.