The Bank of Japan (BOJ) has taken a notable step by setting the BOJ loss provision on bond transactions to the maximum level for fiscal year 2024. A spokesperson for the central bank confirmed the decision via email on Monday.
This development follows increased market pressure urging the BOJ to raise interest rates. Despite such calls, the BOJ chose to keep short-term rates steady during its May meeting. Nevertheless, the central bank clearly anticipates potential volatility.
Unlike previous years, the BOJ loss provision now stands at 100% of potential losses from bond transactions. Historically, the bank aimed for a provision closer to 50% of estimated gains or losses.
According to reports, these provisions are funded through earnings from bond deals and other related transactions. The BOJ relies on this strategy to cushion against future market instability.
The Nikkei newspaper first reported the adjustment earlier on Monday. The report also highlighted that the provision shift indicates the BOJ’s heightened caution regarding market risks.
Furthermore, analysts see this as a signal that the central bank is bracing for possible losses if yields continue to rise. Increased yields reduce bond prices, leading to potential valuation losses for the BOJ’s large portfolio.
Although the BOJ has not altered its official policy path, this financial safeguard suggests internal concerns. By committing the full BOJ loss provision, the bank sends a message about its readiness to absorb shocks.
In the months ahead, economists will closely watch how this move affects the BOJ’s broader policy stance. It also raises questions about whether the bank will shift away from its ultra-loose monetary policy.
As of now, the BOJ continues to balance between defending growth and addressing inflation. The decision to allocate the full BOJ loss provision shows a precautionary stance amid unpredictable bond market dynamics.
