BOJ To Quadruple Rate of Reserves To Offset QE Assets

The Bank of Japan will set aside four times the amount of money it normally would as reserves to offset the risk posed by the assets it is rapidly adding to its balance sheet with its quantitative easing.

The BOJ said on Friday that it has requested permission from the finance ministry to set aside 20 percent of the funds left over after the central bank closes its books for fiscal 2013, which ended in March. The finance ministry is likely to approve.

Currently, the BOJ is required to set aside only 5 percent of excess funds. The BOJ will announce its results for fiscal 2015 sometime in late May.

Since April last year, the BOJ has rapidly increased its purchases of government debt and riskier assets, such as real estate investment trusts and exchange-traded funds, as part of quantitative easing aimed at ending 15 years of deflation.

As a result, the BOJ’s balance sheet has expanded to 246 trillion yen ($2.42 trillion) at the end of April from 164 trillion yen at the end of March last year.

This has pushed the central bank’s capital adequacy ratio below its desired level of 8 percent, so the central bank judged that it was necessary to increase the reserves it would set aside, according to an official from the monetary policy board’s office.

The BOJ has kept monetary policy steady since expanding quantitative easing in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in two years. ($1 = 101.6 yen)

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza