Bank reserves at the Bank of Japan (BoJ) have fallen since the start of the year despite ongoing securities buying under the asset purchase program (APP). This could suggest that the BoJ under outgoing Governor Shirakawa has been fighting a rearguard action against government pressure for monetary activism by sterilising its QE operations – or, indeed, over-sterilising. On closer inspection, however, the fall in bank reserves appears to reflect a seasonal rise in government cash at the BoJ – reserves should rebound as this increase reverses.

The first chart shows BoJ total assets / liabilities and bank reserves, along with projections for 2013 based on current APP plans and an assumption that other balance sheet items are unchanged at end-2012 levels. Assets are tracking the projection: year-to-date APP securities purchases of ¥7.9 trillion by 10 March are consistent with the first-half target of ¥18.4 trillion, while changes in other holdings / loans have been offsetting.

Why, then, are bank reserves undershooting – by ¥13.1 trillion currently? The answer is that the government has increased its lending to the BoJ significantly since the start of the year. Other things being equal, a rise in government cash at the BoJ implies a withdrawal of funds from the rest of the economy, reflected in a fall in bank reserves. Government deposits at the BoJ plus lending under repurchase agreements rose by ¥15.2 trillion between end-2012 and 10 March.

This rise in government cash appears to reflect seasonal factors rather than any policy decision – lending to the BoJ expanded similarly in the first three months of the last three years, as the second chart shows. The seasonal pattern suggests that the recent increase will reverse sharply in late March / April, in which case bank reserves should reconnect with the projection. Such a rebound in reserves would coincide with the arrival of new Governor Kuroda and could be misconstrued as signalling a further BoJ policy shift.