Though Pussyfooting Around on Rate Hikes, the Bank of Japan Pushes QT to Prop Up the Plunging Yen

Its QT is substantial and ongoing and impacts long-term yields of Japanese Government Bonds.

By Wolf Richter for WOLF STREET.

Total assets on the Bank of Japan’s balance sheet fell by another ¥15.5 trillion (-$98 billion) in the quarter ended September 30, and by ¥70.8 trillion (-$445 billion) year-over-year, to ¥625 trillion ($3.95 trillion), the lowest since March 2020, according to the BOJ’s balance sheet today.

Since the peak of its holdings in Q1 2024, the BOJ has shed ¥131 trillion, or 17.4% of its total assets – a substantial amount of QT in a relatively short period of time. The BOJ started QT about two years after the Fed, but the Fed stopped nearly a year ago, and the BOJ keeps going.

QT instead of rate hikes: The BOJ has raised interest rates at a pace of one baby step every Blue Moon, roughly. Since its first rate hike in March 2024, it has hiked its policy rates all the way to a whopping 1.25%, the highest whopping rate in 31 years, OMG! If this sounds ridiculous, it’s because it is ridiculous.

It shows how stuck the BOJ has been on free money, and it seems the only reason it is hiking at all is to keep the yen from collapsing further.

But it is using QT as primary tool to prop up the yen and deal with inflation that has been flourishing in Japan.

QT impacts long-term yields, and long-term JGB yields have soared: the 10-year JGB yield to 3.09% today, from negative in 2020; and the 30-year yield to 4.21% today.

As much as the BOJ is pussyfooting around with rate hikes, its QT, even if it started belatedly, is substantial and impactful on long-term yields.

Japanese Government Bonds on its balance sheet declined by ¥14.3 trillion in the quarter, the biggest quarter-over-quarter decline since the BOJ started QT, to ¥504 trillion, the lowest since March 2020.

It no longer holds any short-term Treasury bills.

Since the peak in 2023, its holdings of Japanese government securities have dropped by ¥88.2 trillion, or by 14.9%. They now account for 79% of the BOJ’s total assets.

Loans remained roughly unchanged in the quarter at ¥68 trillion, after the plunge in the prior quarter.

Since the peak in Q1 2022, the outstanding loan balance has fallen by ¥83.1 trillion, or by 55%.

These loans now account for 11% of the BOJ’s total assets. The BOJ provided loans to banks and other entities under several programs, including the pandemic-era loans:

The BOJ started selling its equity ETFs and J-REITs this year. Unlike bonds that come off the balance sheet when they mature and are redeemed by the government, ETFs and Real Estate Investment Trusts are traded on the stock market, and they don’t mature, and to get rid of them, the BOJ has to sell them outright.

And it started doing that at a glacial pace. In Q3, it sold ¥90 billion ($568 million), of ETFs and J-REITs.

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

And the ¥90 billion in sales in Q3 were at acquisition cost. But measured in current market prices, the sales were by multiples higher.

The BOJ sold off its last bank stocks in Q3 2025. It had purchased them in the early 2000s and again in 2009-2010, and started selling them in 2016. It took nearly 10 years to get rid of them.

Its combined holdings of ETFs, J-REITs, and bank stocks (now at zero) have declined by 1.3% from the peak – so slow that it looks like a flat line on the 16-year chart.

Corporate bonds fell by ¥560 billion in the quarter to just ¥1.07 trillion. The BOJ already shed its last commercial paper earlier this year, and they’re down to zero. They were always just a minuscule part of its balance sheet. Combined, they have declined by 91% from the peak.