BoJ's bond holdings edge towards the size of Japan's economy

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan's massive stimulus programme took the size of its government bond holdings to levels roughly 90% the size of the world's third-largest economy as of March, central bank data showed on Wednesday.

The increase in bond holdings underscores the massive scale of the BOJ's money printing aimed at reflating the economy and achieving its elusive 2% inflation target.

The size of the BOJ's foreign currency assets also nearly quadrupled during the fiscal year that ended in March, as the central bank ramped up dollar-funding operations to cope with market strains caused by the coronavirus pandemic.

The BOJ's government bond holdings rose 3.4% from a year ago to 486 trillion yen ($4.5 trillion) as of March, roughly 90% the size of the country's economy, according to the central bank's earnings report for the previous fiscal year.

The pace of bond buying is likely to accelerate in the current financial year after the BOJ pledged in April to buy an unlimited amount of bonds to combat the economic fallout from the coronavirus pandemic.

Japan's government on Wednesday compiled a new $1.1 trillion stimulus package to keep the pandemic from pushing the economy deeper into recession, which will be funded by an additional 32 trillion yen in fresh bond issuance.

The BOJ's earnings report also showed that latent profits on the central bank's holdings of exchange-traded funds (ETF) narrowed to the smallest level since fiscal 2011.

The BOJ estimates that its ETF holdings will incur losses once the Nikkei stock average falls below 18,500. The Nikkei average stood around 21,400 on Wednesday.

Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around zero via aggressive bond buying. It also buys risky assets such as ETFs to keep markets stable and pump money into the economy.