BOJ Faces $12 Billion Loss Risk in Aggressive Rate Hike Scenario
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The Bank of Japan (BOJ) could face a substantial financial hit, potentially exceeding ¥2 trillion ($12.7 billion), if it aggressively raises interest rates to 2%, according to a new report published by the central bank itself. This information, as reported by Nikkei Asia, comes from the central bank's first estimate of its kind.
The report, issued Thursday, outlines a worst-case scenario where the BOJ hikes the short-term policy rate by 75 basis points annually until reaching 2%, while maintaining a 25 basis point spread between the short-term rate and long-term bond yields.
This scenario, while deemed unlikely given the BOJ's recent decision to hold the rate steady at 0.25%, highlights the significant financial strain associated with a rapid rate hike.
Under these conditions, the BOJ would experience zero earnings in fiscal years 2025 and 2026. The maximum loss would materialize in either fiscal 2027 or 2028.
The BOJ's financial predicament stems from the need to pay higher interest on deposits held by commercial banks at the central bank. As the short-term rate rises, these interest payments increase, putting downward pressure on the BOJ's earnings.
While a rise in long-term rates would generate higher yields from Japanese government bonds (JGBs), the BOJ's existing JGB holdings would need time to be replaced with bonds carrying the new higher rates, delaying the full impact on revenue.
The BOJ's report indicates that the financial strain would gradually ease, with the bank potentially returning to profitability around fiscal 2031.
The BOJ also forecasts a decline in its own capital, estimated at ¥14 trillion for fiscal 2024. This capital is projected to shrink to approximately ¥1 trillion by fiscal 2029 or 2030, potentially placing the bank's capital adequacy ratio well below its 8%-12% target.
Despite these potential financial challenges, the BOJ asserts that a temporary deficit or excess liabilities would not hinder its ability to effectively manage monetary policy.