The Bank of Japan (BOJ) recorded a historic valuation loss of 427 trillion won on its government bond holdings last year, the largest on record, as recent interest rate normalization eroded the value of bonds it had accumulated through years of quantitative easing.
According to Japanese media outlets including Kyodo News on Tuesday, the BOJ's fiscal 2025 settlement results (April 2025 to March 2026), released the same day, showed that the book value of its government bond holdings stood at 530.8695 trillion yen (approximately 4,993 trillion won) as of the end of March. The market value of the bond holdings, however, came to just 485.428 trillion yen (approximately 4,500 trillion won). The valuation loss alone reached 45.4414 trillion yen (427 trillion won).
This represents an increase of about 17 trillion yen (approximately 159 trillion won) from the previous year and marks the largest figure on record. The BOJ had been purchasing government bonds on a massive scale under its quantitative easing policy to suppress long-term interest rates. But as monetary policy normalization led to consecutive rate hikes, the value of its bond holdings plunged.
Adding to the pressure, rising crude oil prices stemming from instability in the Middle East, mounting inflation, and concerns over fiscal deterioration have pushed up long-term government bond yields. As the exit strategy from quantitative easing begins in earnest, the bill has come due all at once.
Because the BOJ typically holds government bonds until maturity, valuation losses are not immediately reflected in its accounting profit and loss. This means the financial burden has not yet materialized. However, if interest rates continue to rise, the valuation loss could grow further. The possibility cannot be ruled out that the broader profit structure may be shaken as interest payment burdens increase.
The results were mixed. Valuation gains on the BOJ's exchange-traded fund (ETF) holdings rose 1.7-fold to 57.0657 trillion yen (approximately 536 trillion won) from 32.8712 trillion yen (309 trillion won) the previous year, buoyed by rising stock prices. However, the current surplus, equivalent to a corporation's net profit, fell 14.9% from the previous year to 1.9263 trillion yen (approximately 18 trillion won). While asset valuations were strong, actual profitability deteriorated.
The BOJ's settlement carries significant implications for major central banks, including the Bank of Korea. As the long era of quantitative easing draws to a close and a normalization phase begins, the financial soundness of central banks faces a new test.
