The BOJ’s July 2026 balance sheet shows that the 12-month cumulative decline in JGS holdings deepened to ¥49.5 trillion, compared with ¥49.2 trillion in the previous month. Meanwhile, the net increase in JGS holdings during a non-redemption month was ¥1.0395 trillion, the smallest in the data period. The contraction in purchase flows therefore continues to accelerate the decline in the stock of holdings. Total assets rose by ¥4.7 trillion month on month to ¥644.3 trillion, but the increase was driven not by JGS holdings but by a rebound in loans outstanding. Year on year, total assets remained down by double digits, at -10.69%. On the liability side, current account balances declined to ¥438.0 trillion, reducing their share of total assets to 68.0%.
Net JGS Increase in Non-Redemption Months Down 25% Year on Year; Decline in Holdings Accelerates
Monthly changes in JGS holdings follow a clear seasonal pattern. According to the BOJ’s Statements of Account, declines of ¥14.8 trillion to ¥15.8 trillion occur in the quarter-end months of March, June, September, and December, while holdings increase by ¥1.0 trillion to ¥1.6 trillion in other months. The data indicate a structure in which redemptions are concentrated at quarter ends. In non-redemption months, the increase is roughly equivalent to purchases less small-scale redemptions. Accordingly, the reduction in the net increase during non-redemption months can be used as a near-direct indicator of the contraction in purchase flows.
From this perspective, the net increase in non-redemption months fell from ¥1.4 trillion–¥1.6 trillion in October–November 2025 to ¥1.0 trillion–¥1.2 trillion in April–July 2026. July’s ¥1.0395 trillion was 25% lower than the ¥1.3870 trillion recorded in the same month a year earlier. The contraction on the flow side is progressing steadily.
The pace of decline in the stock of holdings has not slowed. The 12-month cumulative decline deepened from ¥49.2 trillion in June to ¥49.5 trillion in July. This was the arithmetic result of the newly added ¥1.0395 trillion being smaller than the ¥1.3870 trillion recorded a year earlier that dropped out of the 12-month rolling calculation.
The key point is that flows and stocks operate on different time horizons. As long as purchases continue to decline, the annual decline in holdings will tend to widen for the time being. Even if purchase reductions were to stop, the 12-month cumulative decline would not begin to narrow until the observation window rolled over, implying a lag of approximately one year. For markets, this is a phase in which monthly supply-and-demand pressure—the flow effect—and the stock-based restraint on long-term interest rates are changing at different speeds.
Loans Outstanding Account for One-Third of the Decline in Total Assets — JGS Share Stuck in the 80% Range
The contraction in total assets cannot be explained by JGS QT alone. The year-on-year breakdown makes the structure clear. Total assets declined by ¥77.1 trillion, from ¥721.4 trillion to ¥644.3 trillion. Of this decline, JGS holdings accounted for ¥49.5 trillion, or approximately 64%, while loans outstanding accounted for ¥25.6 trillion, or approximately 33%. Loans outstanding fell 26.3%, from ¥97.5 trillion to ¥71.9 trillion, reducing their share of assets from 13.5% to 11.2%.
Loans outstanding represent balances under various fund-supplying operations. They have shorter maturities and larger fluctuations than JGS holdings. After declining by ¥13.7 trillion in September 2025 and ¥9.7 trillion in June 2026, loans outstanding increased by ¥3.9 trillion in July. Total assets rose by ¥4.7 trillion month on month in July because this rebound in loans outstanding was added to a ¥1.0 trillion increase in JGS holdings. Reading monthly changes in total assets as a direct measure of QT progress would therefore be misleading. The underlying pace of contraction must be assessed by separating the 12-month trend in JGS holdings from the trend in outstanding operation balances.
The JGS share was 80.6%, down from 81.0% in the previous month, and has not moved significantly from 80.3% in December 2025. Since JGS holdings and total assets are contracting at roughly the same rate, the asset structure’s strong bias toward JGS has not begun to unwind. The 0.4 percentage-point decline in the ratio in July was mainly due to the expansion of the denominator caused by the increase in loans outstanding.
Policy assets—ETFs, J-REITs, and corporate bonds—totaled ¥39.1 trillion, or 6.1% of total assets, up from 5.8% a year earlier. This was not, however, due to an increase in the outstanding balance. ETFs have continued to decline by ¥20 billion–¥34 billion per month since February 2026, falling by ¥30.5 billion in July, while the corporate-bond share declined from 0.5% to 0.2%. The ratio rises despite a decline in nominal holdings because total assets, the denominator, are contracting more rapidly. Policy assets are becoming residual assets whose relative prominence increases as JGS QT advances. At this monthly pace, processing the ¥37.0 trillion ETF balance will take a long time, representing a structural constraint during the exit phase.
Current Account Balances at ¥438 Trillion — Reserves Are Declining Faster Than Total Assets
Adjustment on the liability side is proceeding faster than on the asset side. Current account balances stood at ¥438.0 trillion, down ¥86.4 trillion, or 16.5%, from a year earlier. This was substantially greater than the 10.7% decline in total assets. Current account balances fell from 72.7% of total assets in July 2025 to 68.0%, a decline of 4.7 percentage points.
The background to this asymmetric adjustment lies in the composition of liabilities. Banknotes in circulation stood at ¥115.0 trillion, and demand for cash has not deteriorated significantly even during the sharp contraction in total assets. Because banknotes are relatively stable, current account balances bear most of the adjustment to asset contraction. As a result, the reserve-to-total-assets ratio moves more rapidly than the JGS-to-total-assets ratio on the asset side.
The published monetary base is not included in this data set. Using the sum of banknotes in circulation and current account balances as a proxy produces ¥553.0 trillion. A comparison with the same definition for the previous year—¥524.4 trillion plus banknotes in circulation at that time—is not made here because of data limitations.
On a monthly basis, current account balances increased by ¥9.7 trillion in April 2026. Since the increase in JGS holdings was only ¥1.1 trillion that month, an intra-liability transfer unrelated to asset purchases likely played a role, although the cause cannot be identified because breakdown data are unavailable. Current account balances then reversed sharply, declining by ¥17.3 trillion in May. A single-month fluctuation should not be interpreted as a liquidity trend.
The key implication is for short-term money markets. The 4.7 percentage-point decline in current account balances as a share of total assets over one year means that the excess-funds cushion across financial institutions is steadily thinning. Actual data for the unsecured call rate are missing from this data set, so the degree of pressure on interest rates cannot be assessed here. The key point to monitor is whether loans outstanding turn toward a structural increase as the current-account-balances-to-total-assets ratio continues to decline. A sustained increase in outstanding operation balances would signal that reserve demand is approaching its lower bound.
BOJ and ECB at Approximately -11% Annualized; FRB in an Expansionary Phase
Comparisons among the three central banks should be made using period averages rather than monthly figures. Because the BOJ’s declines are concentrated at quarter ends, a month-to-month comparison can present a misleading picture. Indeed, the month-on-month changes in July were +0.73% for the BOJ, 0.00% for the FRB, and -2.94% for the ECB, making the BOJ appear to be expanding.
When the comparison is standardized using the six-month change from January through July 2026, the picture reverses.
| Central bank | 2026-01 | 2026-07 | Six-month change | Annualized |
|---|---|---|---|---|
| BOJ | ¥682.9 trillion | ¥644.3 trillion | -5.65% | Approximately -11.0% |
| FRB | USD 6.59 trillion | USD 6.74 trillion | +2.28% | Approximately +4.6% |
| ECB | EUR 6.29 trillion | EUR 5.94 trillion | -5.56% | Approximately -10.8% |
- FRB: FRED; ECB: published data from the Statistical Data Warehouse; BOJ: Statements of Account
The BOJ and ECB are proceeding at roughly the same annualized pace of normalization. The way the declines appear in the data differs, however. At the BOJ, declines are concentrated in a stepwise pattern at quarter ends, while the ECB’s contraction is comparatively dispersed across months. Larger monthly changes, such as July’s -2.94%, are also observed at the ECB.
The FRB is moving in the opposite direction. Its balance sheet increased by 2.28% over the six months from January, while remaining unchanged month on month in July. The fact that the U.S. balance sheet is expanding while Japan and Europe continue to contract indicates that the international liquidity environment is changing more gradually than it would in a phase when all three central banks were conducting QT simultaneously.
Consistency of Continued QT with Core CPI at 1.6%
The inflation environment is beginning to diverge from the initial assumptions underlying balance sheet contraction. According to the Statistics Bureau of Japan, June 2026 core CPI rose 1.6% year on year, while headline CPI rose 1.7% and core-core CPI rose 1.7%. Core CPI has declined by 1.4 percentage points from 3.0% in November 2025 and has remained below 2% for four consecutive months. Core-core CPI has also declined from 2.6% in January 2026.
This creates an apparently contradictory combination. Inflation is below target, yet JGS holdings continue to decline at an annual pace of ¥49.5 trillion. The key to a consistent interpretation is the distinction between flow and stock effects. Reducing purchases lowers the degree of accommodation on the flow side, but the primary source of accommodation lies in the level of holdings. At ¥519.4 trillion, JGS holdings still account for 80.6% of total assets, and the stock effect that suppresses the term premium remains. The 8.7% year-on-year decline in holdings should be viewed not as a shift away from accommodation, but as a gradual reduction in its degree.
An alternative interpretation should also be considered. It is possible that continued QT is restraining demand through higher long-term interest rates and thereby amplifying disinflation. However, in this data set, both the business-cycle coincident index and the Tankan survey point toward improvement, and there is no evidence that a slowdown in domestic demand is contributing to the decline in CPI. The detailed data needed to decompose the causes of the CPI decline are outside the scope of this column. An important point for assessment is that core-core CPI at 1.7% is nearly identical to headline CPI at 1.7%, with only a small divergence from core CPI, indicating that the index as a whole is slowing broadly rather than through a single component.
The key issue to monitor is whether the BOJ will revise its balance sheet contraction plan if core CPI settles in the mid-1% range. Balance sheet policy can be operated independently of interest-rate policy, so weaker-than-expected inflation does not necessarily lead immediately to a revision of the JGS purchase plan.
Real Economy Improving Despite Balance Sheet Contraction
Economic indicators do not point to downward pressure from balance sheet contraction. According to the Cabinet Office’s Composite Indexes of Business Conditions, the coincident index stood at 118.2 in June 2026, the highest level in the data period. The leading index was 116.4, unchanged from May and up 8.4 points from 108.0 in September 2025. The lagging index was largely flat at 112.3.
The fact that the coincident index is improving while total assets are contracting by 10.7% year on year indicates that the transmission channel through which declining reserves would restrain the real economy via banks’ lending behavior has not emerged visibly at this point. With current account balances at ¥438.0 trillion, reserve constraints do not yet appear to have reached the stage of becoming a bottleneck for lending.
This consistency supports the policy latitude to continue balance sheet contraction. Conversely, if a reversal in the coincident index and a sustained increase in loans outstanding were observed simultaneously, that should be treated as an early signal that liquidity pressures were beginning to reach the real economy.
Tankan — Current Conditions at a High; Outlook Eight Points More Cautious
The Tankan business conditions diffusion indexes diverge between current conditions and the outlook. In Q2 2026, the large manufacturers’ DI was 22, improving by 5 points from 17 in Q1 and rising 8 points from 14 in Q3 2025. The large nonmanufacturers’ DI remained high at 37, while the small manufacturers’ DI also improved to 9.
The outlook, however, is cautious. The large manufacturers’ outlook DI was 14, 8 points below current conditions, while the large nonmanufacturers’ outlook was 29, also 8 points lower. This increased caution overlaps in time with the progress of balance sheet contraction, but outlook DIs in the Tankan tend to be lower than current-condition DIs even under normal circumstances. The impact of contraction therefore cannot be identified from the DI gap alone. Since this data set contains no information on companies’ financing costs, no causal assessment is made.
The practical implication is clear. As long as current-condition DIs remain at high levels, room remains to continue balance sheet contraction. If the more cautious outlook is realized as a decline in current-condition DIs in the next survey, market pressure to reconsider the pace of contraction will intensify.
Cross-Reference Integration — Three Consistency Checks
Integrating this month’s data along three axes produces the following picture.
- Balance sheet × monetary policy: The 12-month cumulative decline in JGS holdings is ¥49.5 trillion, with no sign of slowing. Purchase flows, as indicated by the net increase in non-redemption months, are contracting, but their effect on the stock requires the observation window to roll over.
- Balance sheet × prices: Core CPI at 1.6% and the 8.7% year-on-year decline in JGS holdings are consistent with a gradual reduction in the degree of accommodation. The stock effect is underpinned by the level of holdings, which still account for 80.6% of total assets and remain high.
- Three-central-bank comparison: On a six-month annualized basis, the BOJ is at -11.0%, the ECB at -10.8%, and the FRB at +4.6%. Japan and Europe are contracting, while the United States is expanding, creating an asynchronous phase.
The most important structural fact is that one-third of the decline in total assets is explained by the reduction in loans outstanding, or outstanding operation balances. There is a lower bound to the contraction in operation balances, and they could reverse as reserves approach the level of required reserves. Even if JGS QT continues, the pace of total-asset contraction may moderate going forward. Measuring QT progress by the rate of decline in total assets therefore loses accuracy in this phase.
Risk Assessment and Outlook
Interest-Rate Risk
The central issue is the potential valuation loss on the ¥519.4 trillion in long-term JGS holdings. This balance accounts for 80.6% of total assets, and valuation losses when interest rates rise will expand in proportion to the size of the holdings. This data set contains no JGS yield or valuation-loss figures, so no quantitative assessment is made. On the liability side, the ¥438.0 trillion scale of current account balances itself determines the sensitivity of earnings to changes in the policy-rate level. Interest-rate risk operates through both sides of the balance sheet.
Path of the Decline in JGS Holdings
A mechanical extrapolation assuming that the current pace of -¥49.5 trillion per year continues would place JGS holdings at approximately ¥470 trillion in mid-2027 and approximately ¥420 trillion in mid-2028. There are, however, two sources of uncertainty. If the net increase during non-redemption months continues to shrink, the decline would be larger than the extrapolated figures. Conversely, the scale of quarter-end redemptions depends on the maturity structure of the holdings and is therefore not constant. Market supply and demand should not be estimated on the assumption of a single extrapolation line.
Three Risk Scenarios
- Accelerated rate-hike scenario: Additional policy-rate increases would affect both valuation losses on JGS holdings and the cost of liabilities. Even if balance sheet policy and interest-rate policy are operated independently, they can amplify each other financially.
- Liquidity-tightening scenario: If the current-account-balances-to-total-assets ratio declines further from 68.0% and the excess-funds cushion thins, this would emerge as a sustained increase in loans outstanding, or outstanding operation balances. It is necessary to determine in the months ahead whether July’s ¥3.9 trillion increase in loans outstanding was a temporary rebound or the beginning of an upward trend.
- Global synchronization scenario: The FRB is currently in an expansionary phase, out of sync with contraction in Japan and Europe. If the FRB were to resume contraction and all three central banks conduct QT simultaneously, a simultaneous change in supply-and-demand conditions in major government bond markets would become a risk factor.
Points to Confirm Next Month
First, whether the 12-month cumulative change in JGS holdings turns from -¥49.5 trillion toward a smaller decline. Second, whether loans outstanding rise further from ¥71.9 trillion, signaling that reserve demand has bottomed out. Third, whether the monthly decline in ETF holdings remains within the ¥20 billion–¥34 billion range. These three points will help identify the next phase of balance sheet policy.
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 of Japan, Consumer Price Index
- Source: Cabinet Office, Composite Indexes of Business Conditions
- Source: Bank of Japan, Tankan—Short-Term Economic Survey of Enterprises in Japan
Glossary
Passive QT: A method of passively shrinking the balance sheet by stopping or reducing reinvestment of maturing securities. It is distinguished from active QT, which involves outright sales in the market. When redemptions are concentrated in particular months, holdings decline in a stepwise pattern.
Flow and Stock Effects: The flow effect is the impact of monthly JGS purchases on market supply and demand and price formation. The stock effect is the impact of cumulative holdings in suppressing long-term interest rates and the term premium. Because the stock effect persists as long as holdings remain, the two effects must be assessed separately.
Statements of Account: A preliminary BOJ balance sheet published every 10 days. It provides high-frequency data on balances on the asset side, including JGS holdings, ETFs, and loans outstanding, and on the liability side, including banknotes in circulation and current account balances.
Current Account Balances (Reserves): Deposits held by financial institutions at the BOJ. They are the largest item on the BOJ’s liability side and serve as the adjustment valve during balance sheet contraction. Because banknotes in circulation are relatively stable, the impact of asset contraction tends to be concentrated in current account balances.
Policy Assets: In this column, the combined holdings of ETFs, J-REITs, and corporate bonds. Their balances decline more slowly than JGS holdings, so their share of total assets tends to rise relatively as balance sheet contraction progresses.
Term Premium: The additional component of a long-term bond yield that compensates for the length of the maturity. When a central bank holds large quantities of long-term bonds, the effective supply available to the market declines and the premium is compressed. QT works in the opposite direction.
12-Month Cumulative Change (Rolling Calculation): An indicator calculated by summing monthly changes over the most recent 12 months. It is used to gauge the annual pace of a strongly seasonal series. As the observation window rolls forward, the figure is affected not only by the latest month but also by the value from one year earlier dropping out.
Monetary Base: The total quantity of money supplied by a central bank, consisting of banknotes in circulation, coins in circulation, and current account balances at the central bank. Because the published figure is missing from this column’s data set, the sum of banknotes in circulation and current account balances is used as a proxy.
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.