Bank of Japan Sets Record Provision Amid Surging Bond Losses

The Bank of Japan (BOJ) has set aside the maximum possible provision to cover potential losses from its bond transactions for fiscal year 2024, according to a spokesperson from the central bank.

BOJ confirmed that it has allocated a 100% provision against the potential losses incurred from trading government bonds — a sharp deviation from its usual practice of covering around 50% of such losses or gains.This significant move reflects the growing pressure on Japan’s central bank to raise interest rates, even as it held short-term rates steady during its May policy meeting.

Bond Losses Hit Record Highs

The decision comes at a time when the BOJ is grappling with unrealized losses on Japanese government bonds (JGBs), which soared to an all-time high of $198 billion in fiscal 2024. That figure is three times higher than the losses recorded in the previous fiscal year, which were around $66 billion.

Driving these losses is the sharp rise in long-term bond yields across Japan:

• The 10-year JGB yield nearly doubled over the year, reaching approximately 1.5% by the end of March.

• The 30-year yield also surged, climbing by nearly 70 basis points to about 2.5% during the same period.

These rising yields, especially over the past two months, have accelerated paper losses and added more pressure on the central bank’s balance sheet.

Provision Funded by Market Income

The Nikkei newspaper, which first reported the story, noted that the increased provision will be funded through income generated from bond and other financial transactions. This approach ensures that the BOJ can safeguard its financial position amid volatile market conditions.

Why It Matters

The BOJ’s move highlights the growing financial stress caused by its massive bond holdings, which were accumulated over years of aggressive monetary easing. As yields rise and bond prices fall, central banks holding large volumes of long-term debt — like the BOJ — face substantial unrealized losses.While these are “paper losses” and do not immediately impact cash flow, they raise concerns about the sustainability of ultra-loose monetary policy and the central bank’s ability to normalize interest rates without damaging its balance sheet.

BOJ Members Divided on Bond Tapering Pace

The Bank of Japan’s latest meeting revealed differing views among members on how to proceed with reducing its government bond purchases. Some participants called for a faster pace to improve market functioning, while others preferred a slower, more gradual reduction to avoid market disruption.

One member suggested tapering should be accelerated from April 2026 onward, while another saw no issue with continuing the current pace even beyond that date. Concerns were raised about declining liquidity in certain long-term bond segments, prompting suggestions to better balance reductions across different maturities.

There were also contrasting views on the scale of reduction. One member proposed cutting the quarterly reduction amount from 400 billion yen to 200 billion yen, while another supported continuing reductions until bond purchases hit zero. Meanwhile, one participant even suggested a temporary pause in the tapering process.

One member suggested that from April 2026, the BOJ should sharply reduce its monthly purchases to about 1 to 2 trillion yen. Another member supported a gradual reduction, recommending that the current pace of tapering continue until purchases reach around 1.5 to 2 trillion yen per month.

On the other hand, a different member preferred keeping the monthly purchase amount steady at about 3 trillion yen for some more time, indicating a more cautious approach. Meanwhile, concerns were also raised about the declining liquidity in the super-long-term JGB market, with a suggestion that the BOJ should adopt more flexible measures specifically for that segment to ensure smooth market functioning.

Overall, the BOJ faces internal disagreement on both the speed and scale of its bond tapering strategy, highlighting the challenge of balancing market stability with policy normalization.

Summary:

BOJ sets aside 100% provision for bond losses in FY2024.

Unrealized losses hit $198 billion, up 3x from the previous year.

Driven by surging 10-year and 30-year JGB yields.

Provision funded from bond and investment income.

Signals rising pressure on BOJ as it navigates rate hikes and market volatility.