BOJ Balance Sheet Feb 2026: QT Deceleration & Liquidity Shrink

Total assets increased slightly month‑on‑month to ¥683.8 trillion (+¥0.9 trillion). From ¥747.1 trillion a year earlier, total assets have fallen ¥63.3 trillion (‑8.47%), and are about ¥61 trillion smaller than the estimated peak in 2022 Q1. The monthly change rate was +0.13%, very small compared with the large contraction months of September 2025 (‑¥28.2 trillion, ‑4.06%) and December 2025 (‑¥20.2 trillion, ‑2.98%). This pattern shows accelerated BS reduction concentrated at quarter ends, with near‑flat movements in other months.

Balance sheet structure: elevated JGS share and policy assets becoming fixed

By asset composition, the JGS share of total assets remained high at 80.0%, up 0.1 percentage point from 79.9% the prior month. It is 1.2 percentage points higher than 78.8% in February 2025, indicating that JGS have relatively increased their weight as total assets shrink. This is primarily driven by a large reduction in loans outstanding (loans: ¥101.6 trillion in February 2025 → ¥83.5 trillion in February 2026, a ¥18.1 trillion decline), reflecting the unwind of various operations.

The loans share is 12.2%, unchanged month‑on‑month but down 1.4 percentage points from 13.6% in February 2025. In absolute terms loans are ¥83.5 trillion and have been broadly stable since the large decline in September 2025 (¥83.8 trillion, a month‑on‑month fall of ¥13.7 trillion). This level represents roughly a 45% decline from the 2022 Q1 peak, suggesting substantial normalization of crisis‑response liquidity operations.

Policy assets (ETF + J‑REIT + corporate bonds) total ¥40.0 trillion, maintaining a 5.9% share of total assets. The breakdown is ETF ¥37.2 trillion (5.4%), J‑REIT ¥0.7 trillion (0.1%), and corporate bonds ¥2.4 trillion (0.4%). ETFs declined slightly by ¥5.3 billion across January and February 2026 (¥5.3 billion in total: ¥5.3 billion in Jan and ¥25.6 billion in Feb? — recorded as small decreases in Jan and Feb), which is likely due to valuation changes and maturities rather than active sales. The policy asset share has risen 0.2 percentage points from 5.7% in February 2025, so these assets have gained relative weight amid total asset contraction.

ETF holdings of ¥37.2 trillion symbolize the BOJ's distinctiveness, representing direct equity market intervention absent at the FRB or ECB. There is no explicit disposal policy for these assets, and they remain effectively fixed even in the QT phase. With JGS at 80.0% and policy assets at 5.9%, the two together account for 85.9% of the BOJ’s asset side, producing a rigid balance sheet dominated by JGS and policy assets.

Reserve balances and the liquidity environment: accelerating reduction in current account balances and structural change

On the liability side, the trend in current account balances is the most important indicator. At end‑February 2026 current account balances stood at ¥461.1 trillion, a month‑on‑month decline of ¥7.0 trillion (‑1.50%). This pace of decline is the largest for a non‑quarter‑end month since the ¥16.1 trillion decline in December 2025. Compared with ¥531.2 trillion a year earlier, current account balances are down ¥70.1 trillion (‑13.2%), showing a clear annual contraction trend.

The ratio of current account balances to total assets fell to 67.4% from 68.6% the prior month (a 1.2 percentage‑point drop). This ratio is an important indicator of the BOJ’s liquidity structure and has declined sharply by 3.7 percentage points over 12 months from 71.1% in February 2025. The monthly trajectory was 71.1% (Feb 2025) → 72.7% (Mar) → 74.3% (Apr) before entering a downtrend after peaking at 73.7% in June, then falling 72.2% (Sep) → 69.5% (Dec) → 67.4% (Feb 2026) with accelerating declines.

The fall in the current account ratio reflects structural liquidity reduction associated with QT. Current account balances are deposits that financial institutions hold at the BOJ and serve as a source of short‑term market liquidity. Their decline results from a combination of (i) asset‑side contraction via reduced JGS holdings, (ii) declines in loans outstanding that remove operational funding, and (iii) absolute declines in current account balances. Notably, in February 2026 total assets were nearly flat while current account balances fell ¥7.0 trillion, implying liquidity contraction proceeding faster than asset contraction.

Banknotes in circulation were ¥116.9 trillion, a slight month‑on‑month increase of ¥0.3 trillion, and up ¥1.1 trillion (0.95%) from ¥115.8 trillion a year earlier, indicating modest cash demand recovery as economic activity normalizes. The banknotes/total assets ratio rose to 17.1%, up 1.6 percentage points from 15.5% in February 2025, reflecting the relative stability of banknotes amid shrinking total assets.

Calculated monetary base (banknotes in circulation + current account balances) was ¥578.0 trillion, down ¥6.0 trillion from ¥584.0 trillion the prior month and down ¥69.0 trillion (‑10.7%) from ¥647.0 trillion a year earlier. The decline in current account balances is the principal driver of the monetary base contraction. The monetary base/total assets ratio stood at 84.5%, down 1.0 percentage point from 85.5% in the prior month. This ratio indicates the relative importance of so‑called "high‑powered money" on the BOJ’s balance sheet; its decline signals a gradual reduction in the BOJ’s liquidity‑supply role.

Comparative view of three central bank balance sheets: international positioning of normalization pace

To evaluate BOJ QT in a global context, compare with the FRB and ECB. As of February 2026, BOJ total assets were ¥683.8 trillion (‑8.47% y/y), the FRB’s total assets were USD 6.61 trillion (+0.30% month‑on‑month), and the ECB’s total assets were EUR 6.23 trillion (‑0.95% month‑on‑month).

On a monthly change basis in February 2026, BOJ was +0.13%, FRB +0.30%, and ECB ‑0.95%. BOJ and FRB showed modest increases while the ECB contracted. However, on a year‑on‑year basis BOJ’s ‑8.47% is the largest reduction among the three, suggesting BOJ has been more advanced in structural QT.

The FRB began QT in June 2022 and reduced holdings at an upper bound pace of up to USD 95 billion per month (USD 60 billion Treasuries, USD 35 billion MBS), though since June 2024 the Treasury cap was reduced to USD 25 billion. The FRB’s month‑on‑month +0.30% in Feb 2026 likely reflects temporary fluctuations driven by maturity flows, while passive QT trends continue. The ECB stopped reinvestment under APP from March 2023 and has been reducing assets at an approximate pace of EUR 15 billion per month; the ECB’s ‑0.95% in Feb 2026 aligns with that pace.

On a ratio‑to‑GDP basis (nominal GDP assumptions), BOJ’s BS/GDP is roughly 120% (nominal GDP ~ ¥570 trillion), FRB ~24% (nominal GDP ~ USD 28 trillion), and ECB ~40% (euro‑area GDP ~ EUR 15 trillion). BOJ’s relative size is much higher than the other two, reflecting the large asset purchases during QQE. The high BS/GDP ratio implies a longer normalization horizon and substantial market‑value loss risk in a rising rate environment.

Differences in normalization methods matter. All three central banks rely primarily on passive QT (stopping reinvestment of maturities), but the FRB uses a cap framework for a gradual approach, the ECB uses a fixed pace, and the BOJ has a maturity‑driven variable reduction. The BOJ’s planned halving of purchases from April 2026 is a deceleration within the passive QT framework and does not involve active sales. In this respect BOJ’s approach is the most cautious and gradual.

Link with the price environment: consistency of continued QT amid CPI slowdown

According to the Statistics Bureau, February 2026 CPI: headline index 112.2 (y/y +1.3%), core CPI +1.6% y/y, and core‑core CPI +2.5%. Headline and core inflation slowed from January (headline +1.5%, core +2.0%), confirming easing inflationary pressure.

CPI peaked in Apr–Jun 2025 (headline +3.3–3.6%, core +3.2–3.7%) and has entered a clear deceleration phase. By Nov 2025 headline slowed to +2.9% and core to +3.0%, and in 2026 headline and core have further slowed to around +1.3–1.5% and +1.6–2.0% respectively. Core‑core remains relatively high at +2.5–2.6% but has dropped from +3.0–3.4% in Jul–Oct 2025.

Relating CPI slowdown to the balance sheet, the ¥41.8 trillion annual decline in JGS holdings could be tightening financial conditions via rising term premia, thereby suppressing demand and contributing to lower inflation. However, causality is difficult to isolate: energy price moves, exchange rate appreciation (in hypothetical scenarios), and other factors likely also contribute to inflation deceleration.

Relative to the BOJ’s 2% inflation target, headline +1.3% and core +1.6% remain below target, while core‑core +2.5% is above but on a downward trend. Continuing QT in this environment suggests either (i) the BOJ’s cautious assessment of the persistence of price improvements, (ii) a deliberate separation of policy rate normalization and balance sheet normalization, or (iii) attentiveness to structural inflation drivers such as wages. The April 2026 halving of purchases can also be interpreted as a QT slowdown in response to the CPI deceleration. If annual QT slows from ¥41.8 trillion to about ¥30 trillion, the tightening effect on financial conditions will be moderated, easing downward pressure on prices. This adjustment reflects the BOJ’s attempt to find a normalization pace consistent with the inflation objective.

Consistency with the real economy: continuing BS reduction amid growth‑concern

Cabinet Office CI data show the leading index at 112.1 and the coincident index at 117.9 for January 2026. The leading index rose from 110.4 in December 2025 to 112.1, recovering to the highest level since 107.1 in February 2025. The coincident index rose from 114.5 in December 2025 to 117.9, exceeding 116.6 in February 2025.

However, the leading index, while recovering since its April 2025 trough of 104.2, has not surpassed late‑2024 levels (around 110). The coincident index, after a high of 115.8–116.6 in early 2025, dipped to 113.7 in August and has since oscillated in the 114–117 range, suggesting a demand plateau.

METI’s seasonally adjusted industrial production index for February 2025 was 102.2 (month‑on‑month +2.3%), but this is the latest available series in the dataset referenced; production dynamics as of February 2026 are unclear. From March 2024 to February 2025 the index fluctuated in the 99.9–103.0 range without a clear trend, and monthly changes ranged from ‑2.0% to +2.3%, indicating instability in production activity.

Assessing the link between BS reduction and the real economy, the large decline in current account balances (¥70.1 trillion y/y, ‑13.2%) reduces banks’ excess reserves and could affect lending capacity and short‑term market liquidity. Nevertheless, current account balances at ¥461.1 trillion remain high in absolute terms and do not indicate imminent systemwide liquidity shortage. The ¥18.1 trillion reduction in loans appears to be an unwind of crisis‑response operations and is likely to have limited direct impact on standard lending channels.

The simultaneous improvement in CI (Jan 2026) and BS contraction suggests: (i) QT has not yet visibly harmed the real economy, (ii) other supportive factors (fiscal policy, external demand) may offset QT effects, or (iii) transmission to the real economy operates with a time lag. The April 2026 purchase halving could be a precautionary policy adjustment to protect growth.

Corporate sentiment: improved business conditions while QT continues

BOJ Tankan business conditions DI (Dec 2025 survey, Q4 2025) shows large‑manufacturing DI at +15 and large non‑manufacturing DI at +34. Manufacturing DI improved 3 points from +12 in Q1 2025, continuing the post‑2024 Q4 recovery trend. Non‑manufacturing DI at +34 has remained high since Q2 2025.

Forward‑looking sentiment is more cautious: large manufacturing forward DI is +12 (down 3 points from the recent +15), and large non‑manufacturing forward DI is +28 (down 6 points from +34). Medium‑sized manufacturing DI is +16 and small manufacturing DI is +6, indicating smaller firms remain less optimistic.

Relating BS reduction to corporate sentiment, the transmission channel would be current account reductions → higher short‑term rates → increased corporate financing costs. However, the improvement in business conditions DI suggests this channel has not yet materially compressed corporate profits. Manufacturing DI at +15 is favorable compared with post‑2023 levels, and non‑manufacturing at +34 is extremely strong.

The forward‑looking caution may reflect (i) global economic uncertainty, (ii) domestic demand uncertainties, and (iii) concerns about tightening financial conditions. While QT‑related liquidity contraction may begin to affect corporate financing conditions, it has not yet caused a broad deterioration in business sentiment. The April 2026 purchase halving can be read as a policy move informed by this cautious outlook, intended to moderate tightening and protect corporate financing conditions.

Structural consistency: integrated assessment of BS × policy rate, BS × inflation, and cross‑CB comparison

On the relation between BS normalization and policy rates, the BOJ is in a "twin normalization" phase—raising policy rates while reducing the balance sheet. Although call‑rate data are not presented here, rate hikes since 2024 have proceeded alongside QT. This parallel implementation suggests (i) some independence between rate and BS policies and (ii) a staged normalization of financial conditions using two instruments.

The April 2026 purchase halving represents a BS policy decision independent of the pace of rate hikes. It is a de facto QT slowdown intended to moderate the pace of financial tightening. The combination of continued rate hikes and QT deceleration would balance short‑term policy rates and longer‑term BS effects on the yield curve.

On BS normalization and inflation, the coexistence of CPI slowdown (headline +1.3%, core +1.6%) and ongoing QT is evident. The ¥41.8 trillion annual JGS reduction may have contributed to higher term premia → higher long rates → demand suppression → lower inflation. Yet it is not possible to assert BS contraction is the dominant cause; energy and exchange rate factors also matter.

Compared with the FRB and ECB, BOJ’s ‑8.47% y/y stands out as a faster pace of contraction, though BOJ’s BS/GDP ratio (~120%) is also much larger. The April 2026 purchase halving resembles the FRB’s June 2024 QT slowdown (cap reduction from USD 95 billion to USD 25 billion) and fits a global trend toward cautious deceleration in normalization.

The integrated assessment from cross‑reference analysis is: (i) BOJ will continue QT but enter a deceleration phase from April 2026; (ii) given the CPI slowdown and economic plateau, policy adjustments are aimed at avoiding excessive tightening; (iii) globally, BOJ follows the FRB in moving to a slower QT pace, and normalization speeds across the three central banks are converging; (iv) although current account reductions indicate changing liquidity structure, there is no current sign of financial system destabilization.

Risk assessment and outlook: market‑value loss risk and uncertainty in the pace of decline

Market‑value loss risk on BOJ JGS holdings in a rising‑rate environment is the principal concern for BS normalization. Most of the ¥546.7 trillion in JGS are long‑dated; a 1 percentage‑point rise in long rates, assuming a duration of 10 years, implies an approximate market‑value loss of ¥55 trillion. However, the BOJ uses amortized cost accounting for JGS and, under a hold‑to‑maturity assumption, such valuation losses are not realized.

Risks would materialize under scenarios such as (i) a rapid spike in rates causing unrealized losses to exceed equity, (ii) loss of market confidence forcing asset sales, or (iii) accelerating inflation necessitating rapid rate hikes. These risks are not yet manifest, and the April 2026 QT slowdown can be seen as a preventive response to limit rate‑rise risk.

Projecting the path of JGS holdings, if the current pace (¥41.8 trillion per year) continues, reducing holdings from ¥546.7 trillion to a pre‑normalization target (set hypothetically at ¥200 trillion) would take about 8.3 years. With the April 2026 halving lowering the pace to roughly ¥30 trillion per year, the same reduction would take about 11.6 years. In any scenario, balance‑sheet normalization is a multi‑decade scale adjustment spanning well over a decade.

The reduction path for current account balances is also critical and uncertain. The current balance of ¥461.1 trillion is far above the pre‑QQE (2012) level of roughly ¥40 trillion; returning to that level would require about ¥420 trillion of reduction. At the recent annual pace of about ¥70 trillion (Feb 2025–Feb 2026), it would take about six years, and deceleration thereafter would extend the timeline. If current account balances fall below certain thresholds, short‑term market liquidity could become strained, so the BOJ must carefully manage the pace.

Risk scenarios include: (i) a global inflation resurgence forcing accelerated rate hikes and abandoning QT deceleration, (ii) an unexpected domestic downturn prompting temporary suspension of QT and renewed easing, and (iii) financial‑system stress (e.g., bank liquidity crises) forcing a halt to current account reductions and renewed liquidity provision.

The most likely baseline is that QT will decelerate from April 2026 in line with the purchase halving and proceed at a gradual pace of around ¥30 trillion per year. This pace should allow steady normalization while avoiding abrupt tightening of financial conditions. However, developments in inflation, growth, and market conditions could prompt further adjustments (reacceleration or pause).

BOJ balance‑sheet normalization is a historical process of unwinding the large‑scale easing implemented under QQE. As of February 2026, passive QT is proceeding and liquidity‑structure change is accelerating. The April purchase halving marks an important inflection point in this process. The BOJ will continue to manage interest‑rate risk, liquidity risk and real‑economy spillovers carefully as it pursues a normalization path lasting more than a decade.

Data sources

• Source: Bank of Japan, Statements of Account
• Source: Federal Reserve Bank of St. Louis (FRED)
• Source: European Central Bank, Statistical Data Warehouse
• Source: Statistics Bureau, Ministry of Internal Affairs and Communications, Consumer Price Index
• Source: Cabinet Office, Index of Coincident and Leading Indicators
• Source: Ministry of Economy, Trade and Industry, Industrial Production Index
• Source: Bank of Japan, Tankan (Short‑Term Economic Survey of Enterprises in Japan)

Glossary

パッシブQT: Passive QT: a quantitative‑tightening method that passively reduces the central bank’s balance sheet by stopping reinvestment of maturing government securities, contrasted with active sales (active QT).

当座預金: Current account balances: deposits that financial institutions hold at the central bank. Under the reserve system, amounts above required reserves are called excess reserves and serve as a source of short‑term market liquidity.

タームプレミアム: Term premium: the additional risk premium embedded in long‑term government bond yields attributable to the length of the maturity. Large central bank government bond holdings compress this premium.

マネタリーベース: Monetary base: the total amount of currency directly supplied by the central bank. It is the sum of banknotes in circulation and financial institutions’ current account balances, also called high‑powered money.

フロー効果: Flow effect: the short‑term impact on market supply/demand and price formation from the central bank’s monthly asset purchases or sales. In QT, the monthly reduction pace is a key indicator.

ストック効果: Stock effect: the persistent impact of the central bank’s cumulative asset holdings on long‑term yields and the term premium. It is evaluated by absolute holdings and shares of total assets.

国債比率: JGS ratio: the share of government securities in the central bank’s total assets. Its trajectory signals changes in balance‑sheet structure and monetary policy stance.

政策資産: Policy assets: BOJ holdings acquired as part of monetary easing, such as ETFs, J‑REITs and corporate bonds. These are non‑traditional assets that demonstrate the BOJ’s unique balance‑sheet composition.

デュレーション: Duration: a measure of a bond’s sensitivity to interest‑rate changes. It approximates the percentage change in bond price for a 1 percentage‑point change in yield; longer maturity implies higher duration.

償却原価法: Amortized cost accounting: an accounting method that assumes securities are held to maturity and allocates the difference between acquisition price and par over the holding period. Unlike fair‑value accounting, it does not recognize mark‑to‑market valuation gains or losses.

This column was automatically generated by AI integrating Bank of Japan balance sheet data (Statements of Account), Federal Reserve (FRED), and ECB statistics as a BOJ balance sheet analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.