BOJ Balance Sheet at ¥625 Trillion; JGS Runoff Widens

In September 2026, quarterly net declines in the BOJ’s JGS holdings reached ¥14.3 trillion, the largest contraction in the past four quarters. According to the BOJ’s Statements of Account, total assets were ¥625.0 trillion, down 10.2% year over year, while the 12-month cumulative decline in JGS holdings was ¥52.7 trillion. The quarterly net decline has widened as net increases in JGS holdings during non-quarter-end months have diminished, while declines in quarter-end months have remained broadly stable. Meanwhile, the FRB’s total assets are on an upward trend, leaving the three major central banks moving in different directions.

1. Quantifying the QQE Exit: Quarterly Net Decline Widens to ¥14.3 Trillion

The widening quarterly net decline in JGS holdings is explained less by larger declines in quarter-end months than by smaller net increases in other months. JGS holdings fall by around ¥15 trillion in March, June, September, and December, while net increases in other months have been limited to around ¥1 trillion. This sawtooth pattern is consistent with passive QT, in which maturities are concentrated in quarter-end months while purchases continue in other months. However, the data provided show only outstanding balances and do not include a breakdown of maturities, purchases, or reinvestment policy. It is therefore not possible to separate monthly changes into maturities and purchases.

The decline in quarter-end months has been relatively stable, at ¥14.8–15.9 trillion. By contrast, the total net increase in non-quarter-end months contracted by about 48% between 2025 Q4 and 2026 Q3. The widening quarterly net decline has been driven mainly by this reduction in net increases.

However, monthly net increases have not declined steadily. The increase rose from ¥1,079.3 billion in April to ¥1,186.7 billion in May; July’s ¥1,039.5 billion was around the same level as May, despite the intervening quarter-end month. The latest figure, ¥545.8 billion in August, was less than half the ¥1,401.0 billion recorded in October of the previous year. Balance data alone cannot show whether the smaller net increases reflect reduced purchases or maturities occurring within the month.

The 12-month cumulative decline widened from ¥51.7 trillion in August to ¥52.7 trillion in September. This is equivalent to about 9.5% of JGS holdings in September of the previous year, indicating that the BOJ is reducing its holdings at a pace of just under 10% annually.

2. Balance Sheet Structure: JGS Share Holds Near 80%; Loans Drive the Shift in Composition

The main driver of changes in asset composition is not a decline in the share of JGS but a reduction in loans outstanding. As JGS holdings and total assets have declined at roughly the same rate, the JGS share has remained broadly stable, at 80.0% to 80.6%.

Of the ¥70.8 trillion year-over-year decline in total assets, JGS accounted for about 75% and loans outstanding for about 22%. The rate of decline in loans outstanding (18.4%) was about twice that of JGS holdings (9.5%). Loans outstanding have fallen in quarter-end months and partially recovered in January and July, a pattern that has repeated. The data provided do not break down the maturities or amounts of individual operations, so identifying the drivers of this pattern remains an issue for future analysis.

Policy Assets Rise as a Share of Total Assets Due to the Denominator Effect

Policy assets (ETFs, J-REITs, and corporate bonds) totaled about ¥38.7 trillion, or 6.2% of total assets, up from 5.9% a year earlier. However, the cumulative decline in ETFs from January to September 2026 was only about ¥230 billion. The increase in their share is mainly a denominator effect resulting from the contraction in total assets. The corporate bond share fell from 0.5% to 0.2%.

The weight of ETFs in total assets represents the BOJ’s distinctive exposure to risk assets. As JGS holdings decline, the relative weight of this exposure will increase.

3. Reserve Balances and Liquidity Conditions: Current Account Balances Decline Faster Than Total Assets

Current account balances fell by ¥85.5 trillion year over year, or 17.0%, contracting faster than total assets, which declined by ¥70.8 trillion. According to the BOJ’s Statements of Account, current account balances stood at ¥416.6 trillion in September.

The ratio rose in September despite the decline in current account balances because total assets contracted by ¥19.6 trillion, more than the decline in balances. In August, by contrast, total assets edged up while current account balances fell by ¥13.7 trillion. When asset-side movements diverge from those in current account balances, changes in other liabilities account for the difference. The data provided do not include monthly liability breakdowns, however, so it is not possible to identify which items caused the divergence. Monthly ratios fluctuate considerably, making year-over-year changes a more appropriate basis for assessing the trend.

Banknotes in circulation stood at ¥114.2 trillion. The monetary base, according to supplementary BOJ statistics, was ¥532.8 trillion, about ¥2.0 trillion higher than the combined total of banknotes and current account balances (¥530.8 trillion). The data provided do not show the components of this difference. Current account balances account for about 80% of the monetary base, meaning that a reduction in these balances directly translates into a smaller monetary base.

Current account balances remain above ¥400 trillion. However, data on required reserves and excess reserves have not been provided, so it is not possible to assess reserve adequacy directly. One point to watch is whether call rates rise when current account balances fall by more than ¥10 trillion in a quarter-end month.

4. Comparing the Balance Sheets of Three Central Banks: FRB Assets Rise as BOJ and ECB Contraction Continues

Over the period from January to September 2026, for which comparable data are available, the BOJ has contracted the fastest, while the FRB has moved in the opposite direction.

Month over month in September, the BOJ fell 3.1%, the FRB rose 0.3%, and the ECB fell 0.2%. Because monthly changes in the BOJ’s balance sheet are concentrated in quarter-end months, a single-month comparison can overstate the pace of contraction. On a monthly average basis, the BOJ’s contraction has been about 1.4 times as fast as the ECB’s.

The FRB’s total assets increased gradually throughout the data period. The ECB contracted sharply in July, by about 2.9% month over month. The data provided do not include asset-level breakdowns or details of the two central banks’ policy operations. Total asset data alone therefore cannot determine whether the changes were passive or active. GDP data needed to compare balance sheets as a share of GDP are also unavailable, so comparisons of relative size are beyond the scope of this column.

For January–September 2026, the three central banks were not contracting simultaneously. While the FRB’s total assets are increasing, the extent to which contraction by the BOJ and ECB overlaps as a global reduction in central bank assets is limited.

5. Inflation Context: QT Continues While CPI Is Below 2%

Inflation is below 2%, but the pace of contraction in JGS holdings has not eased. According to the Statistics Bureau of Japan, the year-over-year CPI increases in August 2026 were 1.9% for the all-items index, 1.7% for core CPI, and 1.9% for core-core CPI. In October 2025, the respective rates were 3.0%, 3.0%, and 3.1%, representing a decline of more than 1 percentage point in just under a year.

Core-core CPI fell from 2.4% in March 2026 to 1.7% in June, then stabilized at 1.9% in July and August. Even during this period of disinflation, quarterly net declines in JGS holdings remained in the ¥12–14 trillion range. The data show no sign that the pace of balance sheet contraction was adjusted in response to short-term movements in inflation.

An alternative interpretation is that a reduction in the stock effect, through higher term premiums, may have contributed to disinflation. However, the decline in core-core inflation began at the start of 2026, and its timing does not coincide with the widening quarterly net decline in Q3. The available data do not support the conclusion that QT is the main cause of disinflation.

6. Consistency with the Real Economy: Business Activity Indices Remain High

According to the Cabinet Office’s Composite Indexes of Business Conditions, economic indicators have remained firm even as the balance sheet has contracted.

• Leading index: 118.0 in August 2026, up 11.1 points from 106.9 a year earlier
• Coincident index: 118.7 in August 2026. This was down from 120.6 in July but 4.7 points above the year-earlier level of 114.0
• Lagging index: 112.1, broadly unchanged from 112.7 a year earlier

During the period in which total assets contracted by 10% year over year, both the leading and coincident indices rose. At this stage, QT has not manifested in these business indicators as a drag on the real economy. However, lending data from banks have not been provided, so this column cannot assess the effect of declining reserve balances on lending behavior.

7. Corporate Sentiment: Manufacturing Improves, but Outlook Remains Cautious

The BOJ Tankan showed an improvement in business conditions among manufacturers even as QT progressed. The diffusion index (DI) for large manufacturers was 24 in 2026 Q3, up 9 points from 15 in 2025 Q4. The index also improved across company sizes: to 23 for medium-sized manufacturers (up 7 points) and 14 for small manufacturers (up 8 points).

By contrast, the outlook DI was 17 for large manufacturers and 28 for large nonmanufacturers, both 7 points below their recent readings. The large nonmanufacturing DI fell from 37 in 2026 Q2 to 35. Companies are signaling both strong current conditions and caution about the outlook. If long-term interest rates rise as QT proceeds, the effect on financing costs will be an issue to monitor in the next Tankan survey.

8. Structural Consistency: Interest Rate Levels and Balance Sheet Contraction Coexist

Taken together, the cross-references show that balance sheet contraction is continuing independently of inflation movements in an environment where short-term interest rates are above 1%.

• Balance sheet × monetary policy: The call rate was 1.227% in October 2026. The data provided cover only one point in time, so the time-series relationship between policy rates and net JGS declines cannot be tested. The coexistence of positive interest rates and balance sheet contraction can be confirmed
• Balance sheet × inflation: The all-items CPI was 1.9% in August 2026, below 2%, but quarterly net declines have not narrowed. The pace of balance sheet contraction is not moving in line with short-term inflation fluctuations
• Balance sheet × liquidity: Current account balances fell 17.0% year over year, while business indicators and the Tankan improved. There is no evidence that declining reserves are showing up as deterioration in the real economy
• Three-central-bank comparison: With the FRB’s total assets rising and the ECB contracting, the BOJ has the fastest pace of contraction among the three central banks

The call rate (October 2026) and all-items CPI (August 2026) refer to different periods. A simple subtraction would put the real short-term interest rate at around -0.7%, but this is only an indicative figure. As long as real interest rates remain negative, balance sheet contraction represents an adjustment in the degree of accommodation rather than a clear tightening of policy.

9. Risk Assessment and Outlook: A Path to Annual Declines Exceeding ¥50 Trillion and Three Scenarios

If the current 12-month cumulative pace of decline (¥52.7 trillion) continues, a mechanical estimate puts JGS holdings at about ¥451 trillion in September 2027 and about ¥399 trillion in September 2028. If the trend of shrinking net increases over the quarter in non-quarter-end months continues, the actual decline could exceed this estimate.

Data on the average remaining maturity and market value of JGS holdings have not been provided, so valuation losses cannot be quantified. However, when short-term interest rates exceed 1%, the cost of interest paid on current account balances rises. At the same time, it takes time for yields on holdings to reset as securities mature. This structural lag creates a channel through which the BOJ’s earnings can come under pressure.

The following scenarios are possible:

• Base case: Quarterly net declines of ¥12–15 trillion continue, and current account balances move toward falling below ¥400 trillion. The movement in call rates in quarter-end months will show the impact on short-term markets
• Accelerated rate-hike scenario: Higher interest costs on current account balances and larger valuation losses on JGS holdings occur at the same time. It will be necessary to watch for a rise in call rates in months when current account balances fall sharply at quarter-end
• Synchronized global QT scenario: This is unlikely while the FRB’s total assets are increasing. If the ECB’s contraction settles at a monthly pace close to 3%, as in July, and the FRB also begins to contract, the impact on bond supply and demand should be reassessed

There are three key points to monitor going forward. First, will the net decline in JGS holdings in December, a quarter-end month, exceed ¥15 trillion? Second, will the current account balances-to-total assets ratio fall below 65%? Third, will the net increase in non-quarter-end months fall below ¥500 billion? These indicators will help gauge how much further the decline in JGS holdings may accelerate.

---

Data sources

• Source: Bank of Japan, Statements of Account
• Source: Federal Reserve Bank of St. Louis (FRED)
• Source: European Central Bank, Statistical Data Warehouse
• Statistics Bureau of Japan, Consumer Price Index; Cabinet Office, Composite Indexes of Business Conditions; Bank of Japan, Tankan and supplementary statistical data (call rate and monetary base)

Glossary

---

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.