The Bank of Japan’s December 20, 2022 decision to lift the cap on 10-year government bond yields to 0.5% from 0.25% looks on the surface like a minor tweak of monetary policy.

In reality, it’s a hairline crack in the biggest dam in world financial markets. Japan is the world’s number one creditor, a massive exporter of capital to the United States and other borrowing countries.

Now the Bank of Japan wants to bring Japan’s money home to finance a massive government deficit that will be aggravated by a 50% rise in defense spending over the next five years.

That implies higher bond yields in the United States, which can’t count on the Japanese bid for its government bonds during the next several years.

The Bank of Japan is looking to build a bigger capital buffer against potential losses from its bond-purchase program, a move economists say may be preparation for an eventual policy exit.

BOJ Gov. Haruhiko Kuroda submitted a request to Finance Minister Taro Aso to allow the central bank to start hoarding as a provision some of the interest earned on its Japanese government bond holdings.

If Mr. Aso accepts the change, the BOJ will begin to set aside interest gains from the fiscal year ending March, which for that year alone could amount to several hundred billions of yen, according to a person familiar with the matter.

Holding more cash reserves will theoretically empower the BOJ to take more risks, making an expansion of its ¥80-trillion-a-year asset purchases easier, Mr. Nagahama said.

Also, the BOJ will become better prepared for an eventual exit from the present policy that could reduce its earnings or even cause losses depending on financial conditions and how it mops up extra cash in the economy, he said.

The BOJ has bought Japanese government bonds aggressively since Mr. Kuroda launched a bold asset purchase program in April 2013 to win the battle against a long bout of deflation.

Those securities has brought about windfalls, helping the BOJ earn ¥1 trillion in net profits in the year ended in March, the highest in more than a decade.

But the BOJ is generally required to hand over much of its earnings to the government to help finance budget spending, a practice the bank is hoping to change.

The BOJ has retained larger-than-usual portions of its earnings over the past two years, but only through different, temporary approaches. The BOJ will determine the design of the new system with the finance ministry.

The latest move reflects its desire to have a permanent system in place that will make it easier to fatten the bank’s capital base in good times—and tap into the cash at tough times to avoid posting losses.

The Wall Street Journal / ABC Flash Point News 2022.

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22-12-22 17:59

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