Bank of Japan left with few tools to revive the economy

As Bank of Japan (BoJ) gears up for its monetary policy review at next month’s board meeting, concerns are rising that the central bank is left with few tools to revive the economy.

Japan’s biggest banks - Japan Post Bank Co. and the nation’s three so-called megabanks have almost halved their sovereign bond holdings to 114 trillion yen ($1.1 trillion) since March 2013. Japan’s banks are running out of room to sell their government bond holdings, pushing the central bank closer to the limits of its record monetary easing, Bloomberg said in a report.

The BoJ is currently buying roughly 110-120 trillion yen in bonds each year to meet its pledge to expand base money or cash and deposits in circulation by an annual 80 trillion yen ($790 billion). Going forward it is going to be a trouble for BOJ Governor Haruhiko Kuroda to find willing sellers. As a result we might see a modest fine-tuning of its "quantitative and qualitative easing" (QQE) program.

The BOJ's announcement last month of a thorough review of its policy and its effects triggered a sharp bond sell-off. The main challenge for the bank would be to avoid spooking bond markets used to years of unprecedented buying.