Profits at the Bank of Japan have soared to thirteen-year highs on higher income from the bonds it has been buying and gains on foreign currency assets, but the asset pile up could pose problems when the central bank eventually starts tapering.
A little over two years into a massive asset purchase program, the BOJ has been expanding its balance sheet at an unprecedented pace.
For now, those asset purchases are paying off, according to the BOJ's financial statements published on Wednesday. For the fiscal year that ended in March 2015, the BOJ reported net income of 1.009 trillion yen ($8.1 billion), up 28 percent on-year, and the highest level in thirteen years.
Most of the boost has come from a surge in interest income on the bonds that the central bank has been buying up, as well as gains on foreign currency assets on a sharply weaker yen.
But expanding the central bank's balance sheet carries its own risks down the road, analysts warned.
"When the BOJ tapers, it could be facing negative capital not seen in modern history – and may have to ask the government for a capital injection," JP Morgan senior economist Japan Masamichi Adachi told CNBC by phone.
Bumper profits
The BOJ expanded its asset purchases to 80 trillion yen a year at the end of last October, and now owns around a quarter of total outstanding of Japanese government bonds (JGB).
Over the past year, the value of JGBs owned by the central bank surged 30 percent to 220 trillion yen and the assets are throwing off some serious income.
Interest income on JGBs jumped 25 percent on-year to 1.033 trillion yen, while the gains on foreign currency assets soared 27 percent on-year to 857 billion yen.
The central bank even paid taxes of 342 billion yen in fiscal 2014, according to its financial statements.
Taper tremor
The problems could start if the BOJ manages to stimulate inflation and, eventually, starts tapering.
So far, stimulating any inflation, let alone the two percent target, has turned out to be elusive. If anything, Japan is again flirting with deflation: in April, core inflation is expected to slow to 0.20 percent on-year and many economists are forecasting prices will start falling in the coming months.
BOJ Governor Haruhiko Kuroda for his part is sticking to his two percent target, albeit a year later than originally hoped, sometime during the fiscal year 2016.
But the much-desired inflation could decimate the value of the JGBs held by the central bank, particularly if prices rise much higher than the targeted two percent.
The BOJ could be forced to ask to be bailed out by the government, which in turn is likely to be running a huge deficit. Japan's GDP to debt ratio, at around 240 percent, is already the highest in the world.
"As long as inflation is running at two percent and the global economy is in better shape than now, the BOJ won't have too many problems," JP Morgan's Adachi said. The bank is forecasting the BOJ will likely start tapering in 2017.
But if inflation runs much higher for a couple of years after that, the BOJ and the government could be facing a huge crisis, he warned.
"You know what happened in Zimbabwe when people lost confidence in the government and the central bank? Hyperinflation," he said.