(Bloomberg) -- The Bank of Japan’s interest payments on excessive reserves reached a record high, underscoring the costs of policy normalization after it put an end to more than a decade of massive monetary stimulus in March.
The BOJ paid ¥392.2 billion ($2.6 billion) in interest on excess reserves in the first half of the fiscal year that started in April, according to its financial report released Wednesday. Overall net income fell 4.8% from a year ago to ¥1.84 trillion.
Paper losses on its bond holdings ballooned by 45% to ¥13.7 trillion in the six-month period, demonstrating another impact of its policy pivot earlier this year. The bank ended the world’s last negative interest rate in March with its first rate increase in 17 years, and followed up with another hike on July 31.
Wednesday’s report is the first financial statement showing a clear impact from the two rate hikes.
While the state of the BOJ’s finances is unlikely to affect its policy normalization trajectory, the bank’s books are closely watched by analysts. Some warn of the potential for insolvency after the size of the BOJ’s balance sheet as a ratio to the economy grew much bigger than those of other major central banks.
Governor Kazuo Ueda has said that confidence in a nation’s currency is not directly ensured by the assets held by the central bank or its financial soundness, but rather through the appropriate conduct of monetary policy with the aim of achieving price stability.
Although payments related to excess reserves surged, gains from interest earned on bond holdings and loans increased, demonstrating that a rise in the benchmark rate also carries benefits for the central bank’s portfolio.
Unlike other major central banks, the BOJ has seen its finances aided by its holdings of exchange traded funds. Dividends from the assets increased by 11% year on year to ¥1.26 trillion. The total market value of its ETF holdings was ¥70.3 trillion as of the end of September.
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