BOJ to boost its balance sheet buffer, with eye on QQE exit

A man walks past BOJ building in Tokyo
A man walks past the Bank of Japan (BOJ) building in Tokyo, October 30, 2015 REUTERS/Thomas Peter

November 13, 2015

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan on Friday announced a plan to replenish reserves it sets aside to shield its balance sheet against potential losses that may arise when the central bank eyes an exit from its massive stimulus program.

Under a radical stimulus program dubbed “quantitative and qualitative easing” (QQE) launched in April 2013, the BOJ gobbles up government bonds at an annual pace of 80 trillion yen ($652 billion) to flood markets with cash and try to accelerate inflation to its 2 percent target.

With prices still sliding, the BOJ is likely to maintain its massive stimulus program for years to come. But when it eventually tapers its bond purchases, interest rates may rise and bond prices may fall, forcing it to sell bonds at a loss.

When it wants to withdraw stimulus and mop up cash from the market, the BOJ may also have to raise the 0.1 percent interest it pays on excess reserves that financial institutions park with the central bank. The higher costs would hurt the BOJ’s profits.

To guard against such future potential losses, the BOJ plans to increase reserves it sets aside by several hundreds of billion yen, according to officials familiar with the plan.

The replenishment, which requires approval by the Finance Ministry, will help the BOJ maintain its financial health while continuing its radical bond-buying program, they say.

($1 = 122.6500 yen)

(Reporting by Leika Kihara; Editing by Richard Borsuk)