The Bank of Japan is set to hit a milestone in its quest to shrink its massive balance sheet, as its commercial paper holdings head toward zero.
The outstanding amount of CPs on the central bank’s books has dropped to ¥29.9 billion ($196 million) as of Jan. 20, according to BOJ data last week. It could hit zero in the coming weeks, as what remains is about a quarter of the size of the average monthly decline over the past year, according to Bloomberg calculations based on BOJ data.
Photo Credit: Bloomberg
While CPs have accounted for only a small fraction of the central bank’s balance sheet, its disappearance underscores Governor Kazuo Ueda’s persistent march toward normalizing an extraordinary monetary easing program that lasted for more than a decade. The progress also comes after the BOJ announced earlier this month it will begin selling its exchange-traded fund holdings for the first time in January.
Commercial papers are typically used by large-scale businesses to meet short-term funding needs of usually less than one year, unlike corporate bonds which are utilized for longer-term financing.
The BOJ began the temporary purchase of CPs “as an exception among exceptions” in 2009, to address intense market concerns over the ripple effects of the Global Financial Crisis. It saw a return as a tool for monetary stimulus in October 2010.
The program was ramped up when the Covid pandemic upended the global economy and strained financial markets. The ceiling for the purchase of CPs and corporate bonds saw back-to-back increases through April 2020, and was ultimately set at a combined ¥20 trillion, an amount that was four times bigger than before the pandemic struck.
Following steps to downsize purchases since then, Ueda’s board decided in March 2024 to phase out the buying of CPs in a year. That month it also moved to scrap the most aggressive monetary easing program in modern history, including getting rid of negative interest rates.
Overall, the BOJ’s balance sheet stood at ¥677.6 trillion according to the latest data, down by about 11% from its peak reached in the summer of 2024. Long-term government bonds account for about four-fifths of the bank’s portfolio. The central bank is set to review its plan for reducing its bond purchases in June.
The BOJ trails other major central banks in scaling down its balance sheet. The Federal Reserve in October said it will stop shrinking its Treasury holdings beginning Dec. 1, ending a three-year effort after signals of stress intensified in money markets.
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