Written by Laika Kihara
TOKYO (Reuters) – The Bank of Japan for the first time released estimates on how future interest rate hikes would impact its earnings, which showed it would briefly suffer red ink of up to $13 billion if short-term borrowing costs rose to $13 billion. 2%.
The estimates, revealed Thursday in a research paper, underscore the Bank of Japan's intention to continue raising short-term interest rates – now at 0.25% – to levels considered neutral for the economy in the coming years.
The Bank of Japan made estimates based on several scenarios, including one in which short-term interest rates rise to about 1-2% over several years, while the spread between short-term and long-term interest rates moves between 0.25% and 0.75 points. % a point.
In the riskiest scenario, in which short-term interest rates rise to 2% and the spread widens by just 0.25 points, the Bank of Japan would suffer a net annual loss of about 2 trillion yen ($13 billion) in fiscal years 2027 and 2028, estimates show. The results were issued by the Bank's Monetary Affairs Department.
The loss will then start narrowing and the bank's earnings will turn into the black by fiscal 2031, according to estimates.
The Bank of Japan exited a massive decade-long stimulus program in March and raised short-term interest rates to 0.25% in July on a view that Japan was on the cusp of achieving its 2% inflation target sustainably.
Governor Kazuo Ueda has signaled a willingness to continue raising interest rates to levels that do not dampen or overheat growth — which analysts see as somewhere around 1% — in the coming years if Japan continues to make progress in meeting its price target.
Central banks typically reap profits when they ease monetary policy, as the return they earn on their holdings of government bonds exceeds the interest they pay on excess reserves.
In contrast, their profits come under pressure when they tighten policy because they have to pay higher interest on excess reserves to suck money out of the market.
After expanding its balance sheet to nearly 800 trillion yen during years of heavy asset purchases, the BOJ booked a record recurring profit of 4.6 trillion yen in fiscal 2023.
Profits will shrink when the Bank of Japan starts paying interest on excess reserves to raise short-term interest rates.
The Bank of Japan will still earn returns from its huge bond holdings, although the longer it takes to replenish lower-yielding bonds with higher-yielding ones, the larger its losses will become.
Under the quantitative tightening (QT) plan announced in July, the Bank of Japan plans to halve its monthly purchases of Japanese government bonds to 3 trillion yen from January to March 2026. It will conduct a mid-term review of the tightening plan Quantitative in June. Next year to come up with a gradual reduction plan after that.
($1 = 157.7000 yen)
