TOKYO (Reuters) - Big Japanese banks cut their holdings of government bonds to nearly a 2-1/2 year low in May and piled the extra cash in central bank deposits instead of investing in risky assets, Bank of Japan data showed on Monday.
Under its aggressive monetary stimulus plan on April 4, the BOJ buys 70 percent of newly issued Japanese government bonds (JGB) each month, partly to prompt commercial banks to shift funds out of the JGB market and into riskier assets like equities.
Indeed, big banks had reduced their holdings of JGBs for the second straight month by a combined 15 trillion yen ($151 billion) with the balance at 92.8 trillion yen as of the end of May, the lowest since January 2011, the BOJ data showed.
But, faced with increasingly weak global markets, the banks also reduced their holdings of stocks by 125 billion yen to 9.9 trillion yen, and those of foreign securities by 680 billion yen to 26.4 trillion yen.
The big banks instead increased deposits by 8.2 trillion yen to 32.6 trillion yen as they piled up cash in deposits they hold with the BOJ. Doing so makes sense when markets are volatile as BOJ deposits are safe from market swings, and the central bank pays 0.1 percent interest to excess funds parked there.
Financial markets rallied strongly since Prime Minister Shinzo Abe highlighted his brand of aggressive policymaking late last year. They got a further boost in April, when the BOJ unleashed an intense burst of stimulus by pledging to double the supply of money in two years.
But the positive market sentiment turned around in late May when the BOJ's huge asset purchases disrupted the bond market and drove up yields which, coupled with expectations of the U.S. Federal Reserve's tapering of monetary stimulus, hit global stocks and triggered a rebound in the safe-haven yen.
($1 = 99.3350 Japanese yen)
(Reporting by Hiroyasu Hoshi; Writing by Leika Kihara; Editing by Kim Coghill)
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