Late to the QT game, it’s even selling its equity holdings outright. Nothing on its balance sheet is sacred.

By Wolf Richter for WOLF STREET.

The Bank of Japan started quantitative tightening late in the game, and only reluctantly, after the yen had plunged against other currencies and couldn’t find a bottom. But since the BOJ started QT in late 2024, it has proceeded at a solid pace that accelerated as it went.

The plunge of the yen – 53% against the US dollar since the beginning of 2012 – finally triggered the wrong kind of inflation, driven by price spikes of imported energy products, and sharp price increases of imported consumer goods, and of all kinds of components and materials for manufacturers. But the BOJ was aiming for the “virtuous” kind of inflation, associated with strong growth in domestic demand and supported by rising salaries.

The plunge of the yen was getting in the way and was going too far. So the BOJ has been trying to put a floor under the collapse of the yen, and instead of jacking up its short-term policy rates, it started QT in late 2024, and then accelerated the pace, including now selling its equity ETFs outright. Nothing on its balance sheet is now sacred.

That pace of QT allowed yields of long-term Japanese Government Bonds (JGBs) to soar further: the 30-year JGB yield hit 4.0%, up from near 0% in 2020; and the 10-year JGB yield hit 2.7%, up from negative in 2021. At the same time, it only raised its policy rates to a ridiculously timid 1.0%.

So, total assets on the BOJ’s balance sheet fell by ¥23.5 trillion (-$146 billion) in the quarter ended June 30, the largest quarter-to-quarter decline so far in this QT cycle.

Since the peak of its holdings in Q1 2024, the BOJ has shed ¥116.9 trillion (-$726 billion), or 15.6% of its total assets. This is a substantial amount of QT in a relatively short time.

Its holdings are now down to ¥639.6 trillion ($3.97 trillion), the lowest level since Q1 2020, according to the BOJ’s balance sheet data on Thursday.

Its holdings of JGBs declined by ¥12.5 trillion in Q2 (-$78 billion), to ¥518.3 trillion ($3.22 trillion), where they’d first been in Q3 2020.

The BOJ no longer holds any short-term Treasury bills. It shed the last one of them in Q4 2025.

Since the peak in 2023, holdings of Japanese government securities have dropped by ¥73.9 trillion (-$459 billion), or by 12.5%.

They now account for 81% of the BOJ’s total assets.

Loans declined by ¥9.7 trillion (-$60 billion) in the quarter, to ¥68.0 trillion ($423 billion), the lowest since Q1 2020.

Since the peak in Q1 2022, the outstanding loan balance has fallen by ¥83.5 trillion, or by 55%.

These loans now account for 10.6% of the BOJ’s total assets. The BOJ provided loans to banks and other entities under several programs, including the pandemic-era loans that had caused the total amount of loans outstanding to more than triple in two years:

The BOJ is selling outright its equity ETFs and J-REITS, following its announcement last September. The initial pace is minuscule at ¥330 billion ($2.1 billion) in ETFs per year and ¥5 billion ($31 million) in J-REITs per year. It started selling them in Q1.

But that pace of sales is faster than it seems: The BOJ has carried its ETFs and J-REITs at acquisition cost ever since it started buying them in 2011, and has not marked them up to market, while the Nikkei 225 has soared by 500%.

And the pace of sales is also at acquisition cost. But measured in current market prices, these sales are by multiples higher.

The BOJ sold off its last bank stocks in the September quarter. It had purchased them in the early 2000s and again in 2009-2010, and started selling them in 2016.

In Q2, the BOJ sold ¥120 billion (-$74 million) at acquisition cost of equity ETFs and J-REITs – by multiples more at current market prices. Since the peak, it sold ¥390 billion ($2.4 billion) at acquisition cost, bringing its balance down by 1.0% at acquisition cost, to ¥37.6 trillion ($234 billion).

The decline of 1.0% from the peak has been so slow that it looks like a flat line on the 16-year chart. Hence the magnified insert.

Corporate bonds fell by ¥563 billion ($3.5 billion) in the quarter to just ¥1.63 trillion ($10 billion). The BOJ already shed its last commercial paper in Q1, and they’re down to zero.

They’re now essentially gone and were always just a tiny part of the BOJ’s QE operations, at their peak accounting for only 2.2% of the BOJ’s total assets.

QT instead of bigger rate hikes. With this substantial quantitative tightening, instead of with steeper rate hikes, the BOJ is attempting to put a floor under the yen, which has been plunging for years, and is down by 56% against the US dollar since 2012.

And it is also trying to deal with the wrong kind of inflation that is percolating through the economy via import prices.

But it has only minimally hiked its policy rates, in tiny steps spread far apart, to only 1.0%. Instead of jacking up its policy rates, the BOJ has been assertive with its QT, which allowed long-term yields to soar. A late start, but catching up. With short-term yields near 1% and 30-year yields near 4%, it makes for a steep yield curve.

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