BOJ to boost reserves as record easing

[TOKYO] Japan's central bank is seeking approval to retain a quarter of its profit as capital, increasing a cushion against potential losses on a balance sheet that's growing at a record pace.

The Bank of Japan has asked the Ministry of Finance for permission to boost the proportion of its earnings it can put into its legal reserve to 25 per cent for the 12 months that ended March 31, from 20 per cent in the previous fiscal year, it said in a statement Tuesday.

Increased reserves would help absorb potential losses as Governor Haruhiko Kuroda pursues unprecedented purchases of government bonds and assets linked to stocks and real estate in a bid to generate 2 per cent inflation in the world's third- biggest economy. The move is aimed at maintaining its financial health, the BOJ said.

"This is the minimum requirement for the BOJ amid its massive bond purchases," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. "It's technically ok for the central bank to make losses but it's not ok politically. The BOJ wants to keep itself free from political pressure by preparing for any potential losses." The central bank introduced the record asset purchase plan in April 2013 and expanded it last October, giving it room to buy all new bonds issued by the finance ministry. Its key gauge of inflation was 1/10th its target in March.

Mr Kuroda said last month that working level officials at the BOJ were studying technical aspects of an eventual exit from record easing, but that such discussions hadn't been taken up at the policy-board level.

"The most important factor for the BOJ's exit is that the government keeps fiscal trust until the BOJ exits," BNP's Shiraishi said.

The BOJ's total assets stood at 333.8 trillion yen (US$2.78 trillion) as of May 10, according to its website. That's equivalent to almost 70 per cent of the value of Japan's annual economic output.

The BOJ held 2.9 trillion yen of legal reserves as of Sept 2014, according to the bank's latest earnings report.

BLOOMBERG