TOKYO, Oct 23 (Reuters) - The Bank of Japan's aggressive monetary easing prompted the country's banks to cut their government bond holdings by 24 percent between March and August to reduce risk on their balance sheets, the central bank said on Wednesday.
Major domestic banks held 96 trillion yen ($978 billion) in JGBs as of end-August, a BOJ report showed.
Holdings of regional banks, traditionally aggressive buyers of JGBs as safe investments, stood at 32 trillion yen in August, roughly flat from March.
"Since the BOJ's introduction of quantitative easing, major banks reduced their JGB holdings mindful of the risk of future rises in interest rates," the BOJ said in the report.
The BOJ offered an intense burst of monetary stimulus in April, pledging to buy roughly 7 trillion yen in JGBs each month as well as risky assets to pump money into the economy and achieve 2 percent inflation in roughly two years.
The massive scale of the purchases disrupted markets immediately after the April action, briefly pushing up long-term interest rates. But rates have stabilised around record-lows recently, as the central bank's aggressive asset buying keeps any rise in yields in check.
A one percentage point rise in bond yields would lead to a 6 trillion yen ($61 billion) loss in the valuation of Japanese government bonds (JGB) held by domestic banks as of June, down from 6.9 trillion yen as of March, according to an estimate by the BOJ.
Reflecting the decline in JGB holdings, the amount of interest rate risk domestic financial institutions faced on their balance sheet shrank to 10 trillion yen in June from 10.6 trillion yen in March. That was the biggest quarterly fall in 13 years, the BOJ's semi-annual report assessing Japan's financial system showed.
The decrease in risk came as Japanese banks, mainly big banks, unloaded some of their massive JGB holdings on expectations that the BOJ's aggressive easing will pull the economy out of stagnation and generate inflation in a country mired in deflation for nearly two decades.
The central bank had hoped its huge bond buying would also prompt Japanese financial institutions to shift money away from JGBs and into loans and risky assets like foreign bonds.
But that has not happened in a significant degree so far due to "uncertainty over the global economy and financial markets," the report said, suggesting that domestic financial institutions remained cautious of investing overseas partly because of market volatility caused by speculation over the timing of the U.S. Federal Reserve's tapering of its asset purchases.
Interest rates tend to rise when markets expect economic conditions to improve as that usually accelerates inflation, prompting investors to seek higher returns.
Japan's public debt burden is the biggest in the world at nearly twice the size of its $5 trillion economy, but domestic investors hold most of this debt as commercial banks tend to favour the safety of investing in JGBs rather than lending to other firms. ($1 = 98.1550 Japanese yen) (Reporting by Leika Kihara; Editing by Richard Borsuk)