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TOKYO (Reuters) - The Bank of Japan saw interest payments on its huge government bond holdings decline for the first time in five years in the fiscal year that ended in March, a sign that its ultra-loose monetary policy was taking a toll on its financial health.
The central bank's capital adequacy ratio stood at 8.07 percent in March, barely meeting the 8 percent threshold it considers as adequate in maintaining financial soundness, its fiscal 2016 earnings statement showed on Monday.
The results underscore the mounting cost of the BOJ's radical stimulus program that aims to cap short-term interest rates at minus 0.1 percent and 10-year government bond yields around zero percent through massive money printing.
They also highlight the potential huge loss the BOJ could incur if market expectations of a withdrawal of stimulus spark a sharp sell-off of government bonds, analysts say.
"The BOJ is sacrificing its financial health to sustain its radical monetary easing steps," said Mari Iwashita, chief market economist at SMBC Friend Securities.
"If inflation eventually hits its 2 percent target and pushes up bond yields, the BOJ could incur enormous losses on its bond holdings."
In the fiscal year ended in March, the BOJ's interest from its government bond holdings fell 100 billion yen from a year earlier to 1.2 trillion yen ($10.8 billion), the first decline in five years.
That was largely because the yield on investment for its bond holdings slid to a record low 0.301 percent from 0.413 percent the previous year. The yield has declined for eight straight years.
After years of aggressive bond purchases, the BOJ's government debt holdings expanded 19.6 percent from a year earlier to 417.7 trillion yen - roughly 80 percent the size of Japan's economy.
The BOJ set aside 461.5 billion yen in reserves for any future losses on its bond holdings, compared with 450.1 billion yen the previous year.
The central bank had net income of 506.6 billion yen in the latest fiscal year, up 96 billion yen from a year earlier, as the yen's depreciation inflated earnings on its foreign-currency denominated assets.
The BOJ's balance sheet swelled after the adoption in 2013 of its "quantitative and qualitative easing" (QQE) program that aimed to accelerate inflation to 2 percent through huge purchases of government bonds and private assets.
After years of asset buying failed to drive up inflation, the central bank added negative interest rates to QQE in January 2016 and revamped its policy framework in September to one that aims to control the yield curve.
($1 = 111.3900 yen)
Reporting by Leika Kihara; Editing by Richard Borsuk