BOJ to Jiggle Its Books

The Government Pension Investment Fund recorded a record loss in FY2002 of JPY3.1 trillion, making their cumulative losses on investments of JPY6.1 trillion, versus JPY50.2 trillion of pension funds. The BOJ is now also an equity investor, buying stocks from the banks of up to JPY3 trillion, while their holdings of JGBs have seen sharp growth as they continue to purchase JPY1.2 trillion of JGBs per month. The sharp reversal in bond yields has the potential to produce its own set of investment losses, not only at the GPIF, but at the banks, the insurance companies and the BOJ.

But what about BOJ valuation losses? The BOJ just won't report them. The Bank of Japan plans to change next fiscal year its accounting method for its holdings of Japanese government bonds in order to avoid booking paper losses when JGB prices fall. The BOJ's JGB holdings have soared to about 87 trillion yen due in part to its aggressive quantitative easing measures launched in March 2001. Under the current method, the central bank is required to book paper losses on these holdings if JGB prices drop below their purchase prices.

The BOJ thinks that since it holds most of the JGBs until maturity, there is no great need to report paper losses every time they occur. Therefore, the central bank will introduce in fiscal 2004 the amortized cost method, under which the difference between the purchase price and the face value is amortized equally in each year until maturity. The BOJ decided to adopt this method at a policy board meeting in May.

The upcoming accounting change has attracted a great deal of attention in the bond market because investors believe that not being forced to book paper losses every time the market plunges will make it easier for the central bank to buy more JGBs. This will make the bank that much more of an influential player in the fixed-income market.

(TT's Take) This is the same double standard argument that the banks used to use before bond trading was liberalized in Japan. When the stock market was rising during the bubble years and prior, the biggest issue for the banks used to be valuations on their bond holdings. When the going got tough, they would just change the accounting rules. Now, since everyone wants the BOJ to buy more bonds, they are apparently willing to turn a blind eye toward marking-to-market for the BOJ. Without having to re-value bond holdings this ostensibly gives the Bank a freer hand to purchase lots more JGBs. The BOJ is already not only the buyer of last resort in the bond market, but is essentially guaranteeing that bond yields won't get out of hand by standing ready to make evey more substantial bond purchases if need be.