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[TOKYO] The Bank of Japan made as much on its bond holdings on paper in the past year as Mark Zuckerberg is worth.
The valuation gain calculated by comparing the book value of the stake to the market value reached a record 4.81 trillion yen (US$39 billion) as of March 31, based on data the central bank issued last week. The profit compares with Facebook Inc. founder Zuckerberg's US$35 billion worth, according to the Bloomberg Billionaires Index.
Japan's central bank and other debt holders have benefited from its policy of gobbling up bonds to combat deflation, while the key inflation gauge is stuck at zero. The more BOJ Governor Haruhiko Kuroda accelerates purchases to bring consumer price increases to his 2 per cent target, the harder it will become to offload the holdings without inflicting losses on the bank and the debt market.
"The easing policy is a double-edged sword," said Hidenori Suezawa, an analyst in Tokyo at SMBC Nikko Securities Inc, part of Japan's second-biggest bank. "The more they do it for a longer time, the bigger the risk there will be when it ends." Japan's bonds returned 3 per cent in the 12 months ended March 31, based on the Bloomberg World Bond Indexes, reflecting price gains and interest payments. Investors have lost 0.2 percent since then.
The benchmark 10-year yield climbed to 0.39 per cent late last week from the record low of 0.195 per cent set in January. It will be 0.6 per cent by the middle of next year, based on a Bloomberg survey of economists.
In addition to the price gain, the BOJ earned a record 1 trillion yen of interest.
Those gains are the results of its policy of buying as much as 12 trillion yen of government debt a month, its main tool in the fight against deflation. The purchases put downward pressure on borrowing costs and pump money into the economy.
Its 25 per cent stake in the government debt makes it the largest holder at the end of last year, according to central bank data. The US$8.1 trillion market is second in size only to the US.
While BOJ's bonds aren't subject to mark-to-market accounting, the central bank could incur losses if it sold notes from its portfolio in a higher-yielding environment, according to Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. The BOJ "is now vulnerable even to small changes in yields," Mr Sekido, a former BOJ official, said in an interview last month.
Mr Kuroda said last month that the BOJ's earnings will face downward pressure during an eventual exit of the stimulus program, though the bank won't report valuation losses on its debt holdings because of the accounting methods it uses.
The central bank chief also said he expects inflation to rise toward the 2 per cent goal this fiscal year, and that he will adjust policy if needed. The main inflation gauge fell to zero in April when the effects of a sales tax increase are stripped out, government data last week showed, from 1.5 per cent a year earlier.
"While the BOJ continues with its easing, it will profit from it," said Noriatsu Tanji, the senior bond market strategist in Tokyo at Mizuho Securities Co., part of Japan's third-biggest bank. "Once they start to raise interest rates as part of its exit strategy, they are going to face a loss. The higher the mountain, the deeper the valley."