The Bank of Japan
Three ways to draw balance sheets
The summer lull seems like a good time to build some infrastructure.
My work on central banks is frequently built using representations of their balance sheets, of which I maintain a growing collection. I write frequently about the Fed, and not infrequently about the European Central Bank and the People’s Bank of China. I have glanced at the Central Bank of Russia. Each is at the center of a payment system, and each central bank’s balance sheet provides a concise and informative view of what is happening in that payment system.
In this post, I build out three representations of the balance sheet of the Bank of Japan. This yields a (minimalist) visual history of Japanese monetary policy, and along the way provides a case study in how one can go about figuring out central bank balance sheets in general.
Symmetry
I start with a picture like the one below. The dominant visual feature of such a graph is its symmetry, which intuitively and correctly captures the most important structural feature of the balance sheet, namely that at each point in time, assets equal liabilities:
Specifically, this representation puts time on the horizontal axis, with balance-sheet quantities on the vertical axis at each moment in time (each month, in the case of the BoJ). I have separated assets, money lent or securities owned by the bank, from liabilities, funds accepted or securities issued. On this balance sheet as on all balance sheets, funds must come from somewhere and go somewhere, and so total assets equal total liabilities, whence the symmetry. I write liabilities as negative numbers to help convey the point.
This way of drawing a balance sheet gives an intuitive graphical form to periods of expansion and contraction. The Bank of Japan has had several such periods, mostly periods of expansion. From 2001 to 2006, marked by the first two gray lines, the BoJ undertook its first round of so-called quantitative easing, monetary policy explicitly framed in terms of asset purchases. This was to become the prototype for major balance-sheet expansions by other central banks during the 2008 financial crisis, and again at the emergence of the COVID-19. The BoJ’s 2001–2006 expansion is humbled by its own later effort, from 2013 forward as part of the Abenomics set of policies. As a result, the BoJ’s balance sheet now extends to over 700 trillion yen (a bit more than 5 trillion US dollars at today’s exchange rate). Other major central banks have comparably large portfolios.
Mechanics
To see the mechanics of balance-sheet operations, including QE, it can be helpful to unstack the balance-sheet components, showing each as a time series on its own. I do that in the graph below, while leaving the other parameters of the graph unchanged. The overall symmetry is lost, but the details of each entry can be seen more clearly:
The BoJ’s quantitative easing policy from 2013 forward, for example, was very simple in structure: buy government debt and create new reserves. There is no change to the other entries, which proceed more or less as before. (Something about how the Japanese government manages its deposits did shift in 2016—a question for a future post.)
This picture is also helpful for seeing the dynamics of individual balance-sheet items. On the liabilities side, for example, the slow upward drift in currency issuance is punctuated by occasional seasonal ebbs and flows. That we can safely ignore such details is an indication that Japan’s central bankers are managing currency issuance smoothly—the bumps smoothly accommodate seasonal demands for cash, around gift-giving holidays for example.
Push and pull
Balance sheets show stock variables—quantities that accumulate over time: the total amount of bonds owned or money issued. Such quantities show the accumulated residue of past transactions. But for some questions it is more helpful to look not at the levels but at the flows, the month-to-month changes in the same quantities. I find this third representation helpful for that purpose:
Based on the same underlying data as above, this graph shows three-month rolling flows in the BoJ’s balance-sheet entries. I have zoomed in to the pandemic period. In this representation, we lose a sense of the overall scale of the balance sheet, while gaining a sense of the specific transaction flows.
Assets are above and liabilities below, but unlike in the first graph above, here we have flow values, which for any item can be either positive or negative. In both panels, bars pointing outward represent expansion, while bars pointing inward represent contraction. This captures, for example, the fact that money frequently passes back and forth between government deposits and the reserves of commercial banks, as in the second quarter of 2021.
The BoJ’s pandemic interventions come through clearly in this picture. Early in 2020, the central bank borrowed dollars from the Fed and lent them to Japanese banks: an expansion of FX on the asset side, funded by borrowing from the Fed (under other liabilities). This was quickly reversed, and was followed by purchases of Japanese government bonds and lending to banks, funded by expanded reserves and government deposits.
Just a snapshot
There is a lot more that one could know about the details of Japanese monetary policy, the country’s banks and financial system, and the political-economic settlement within which all these details play out. Knowing the central bank’s balance sheet is no substitute for in-depth understanding of the entire system. But for the BoJ as for all central banks, it is a disproportionately informative starting point.