Bank of Japan's Earnings Estimates

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BOJ) has released estimates indicating potential earnings impacts from future interest rate hikes, predicting a temporary loss of up to $13 billion if short-term borrowing costs rise to 2%.

The estimates, disclosed in a research paper on Thursday, highlight the BOJ's commitment to gradually increase short-term interest rates, currently at 0.25%, to levels considered neutral for the economy in the coming years.

The BOJ analyzed several scenarios, with projections showing that in the most extreme case, if short-term rates reach 2% and the difference between short-term and long-term rates widens by 0.25 points, it would incur annual losses of around 2 trillion yen ($13 billion) for fiscal years 2027 and 2028.

According to the estimates, losses are expected to decrease and the BOJ's earnings will recover around fiscal year 2031.

Having exited a decade-long massive stimulus program in March and raised short-term rates to 0.25% in July, Governor Kazuo Ueda indicated a willingness to further increase rates to promote stable economic growth, estimated around 1% in upcoming years if inflation targets are met.

Central banks often see profits when lowering rates since the yield on government bonds exceeds interest paid on reserves. Conversely, earnings decline when rates increase as they compensate with higher interest on reserves.

With its balance sheet approaching 800 trillion yen from extensive asset purchases, the BOJ reported a record profit of 4.6 trillion yen in fiscal year 2023. However, profits are anticipated to decline as the BOJ begins paying interest on reserves to elevate short-term rates, despite generating returns from its substantial bond holdings.

The longer the BOJ takes to replace low-yielding bonds with higher-yielding alternatives, the greater its potential losses may become. Under its quantitative tightening (QT) plan announced in July, the BOJ is set to reduce monthly Japanese government bond (JGB) purchases to 3 trillion yen starting January-March 2026, with a mid-term review planned for June next year to outline future tapering plans.

($1 = 157.7000 yen)