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The Impact of Potential Interest Rate Hikes on the Bank of Japan's Earnings
Dec 27, 2024

The Impact of Potential Interest Rate Hikes on the Bank of Japan's Earnings

The Bank of Japan (BOJ) has made waves by releasing new estimates revealing the potential impact of future interest rate hikes on its earnings. According to a report by Reuters, the BOJ expects to encounter a temporary deficit of up to $13 billion if short-term borrowing costs rise to 2%.

These estimations, unveiled in a detailed research paper, highlight the BOJ's intention to steadily increase short-term rates, which are presently set at 0.25%. The central bank aims to eventually reach levels considered neutral for economic stability. The BOJ's calculations took into account a range of scenarios, one of which projected short-term rates climbing to 1-2% in the coming years, alongside variations in the spread between short- and long-term rates ranging from 0.25 to 0.75 percentage points.

The worst-case scenario foresees a scenario where short-term rates reach the 2% mark and the spread enlarges by a mere 0.25 point, leading to an annual net loss approximately equivalent to 2 trillion yen ($13 billion) in the fiscal years 2027 and 2028. Nonetheless, the BOJ forecasts that these losses will gradually decrease, with its earnings returning to a positive state around fiscal 2031.

The BOJ's decision to exit its prolonged stimulus program in March and the subsequent rate elevation to 0.25% in July aligns with its anticipation of achieving a sustainable inflation target of 2%. Governor Kazuo Ueda has expressed his commitment to continual rate increases to prevent economic overheating or cooling, a stance considered by analysts to potentially reach around a 1% rate in the coming years.

IndexBox notes that central banks typically benefit financially during periods of monetary easing due to the higher yields from government bonds compared to the interest paid on excess reserves. Conversely, policy tightening puts pressure on earnings as higher interest rates must be paid to absorb money from the market. With its balance sheet having expanded close to 800 trillion yen during extensive asset purchases, the BOJ recorded a recurring profit peak of 4.6 trillion yen in fiscal 2023. However, these profits are expected to diminish as the bank starts compensating for excess reserves to increase short-term rates.

Despite the earnings challenge, the BOJ will continue to accrue yields from its substantial bond holdings. Nevertheless, extended periods needed to replace low-yielding bonds with those of higher yield could exacerbate the bank's losses. As part of a quantitative tightening (QT) initiative announced in July, the BOJ intends to reduce its monthly Japanese government bond (JGB) purchases to 3 trillion yen by the January-March quarter of 2026. They'll conduct a mid-term review of this QT strategy in June next year to develop subsequent tapering plans.

The move underscores a critical phase for the BOJ as it steps away from a long-standing monetary stimulus, facing the challenge of managing fiscal losses while striving to maintain economic balance.

Source: IndexBox Market Intelligence Platform

  1. 1. INTRODUCTION

    Making Data-Driven Decisions to Grow Your Business

    1. REPORT DESCRIPTION
    2. RESEARCH METHODOLOGY AND AI PLATFORM
    3. DATA-DRIVEN DECISIONS FOR YOUR BUSINESS
    4. GLOSSARY AND SPECIFIC TERMS

  2. 2. EXECUTIVE SUMMARY

    A Quick Overview of Market Performance

    1. KEY FINDINGS
    2. MARKET TRENDS This Chapter is Available Only for the Professional Edition PRO

  3. 3. MARKET OVERVIEW

    Understanding the Current State of The Market and Its Prospects

    1. MARKET SIZE
    2. CONSUMPTION BY COUNTRY
    3. MARKET FORECAST TO 2030

  4. 4. MOST PROMISING PRODUCT

    Finding New Products to Diversify Your Business

    This Chapter is Available Only for the Professional Edition PRO
    1. TOP PRODUCTS TO DIVERSIFY YOUR BUSINESS
    2. BEST-SELLING PRODUCTS
    3. MOST CONSUMED PRODUCT
    4. MOST TRADED PRODUCT
    5. MOST PROFITABLE PRODUCT FOR EXPORT

  5. 5. MOST PROMISING SUPPLYING COUNTRIES

    Choosing the Best Countries to Establish Your Sustainable Supply Chain

    This Chapter is Available Only for the Professional Edition PRO
    1. TOP COUNTRIES TO SOURCE YOUR PRODUCT
    2. TOP PRODUCING COUNTRIES
    3. TOP EXPORTING COUNTRIES
    4. LOW-COST EXPORTING COUNTRIES

  6. 6. MOST PROMISING OVERSEAS MARKETS

    Choosing the Best Countries to Boost Your Exports

    This Chapter is Available Only for the Professional Edition PRO
    1. TOP OVERSEAS MARKETS FOR EXPORTING YOUR PRODUCT
    2. TOP CONSUMING MARKETS
    3. UNSATURATED MARKETS
    4. TOP IMPORTING MARKETS
    5. MOST PROFITABLE MARKETS

  7. 7. GLOBAL PRODUCTION

    The Latest Trends and Insights into The Industry

    1. PRODUCTION VOLUME AND VALUE
    2. PRODUCTION BY COUNTRY

  8. 8. GLOBAL IMPORTS

    The Largest Importers on The Market and How They Succeed

    1. IMPORTS FROM 2012–2024
    2. IMPORTS BY COUNTRY
    3. IMPORT PRICES BY COUNTRY

  9. 9. GLOBAL EXPORTS

    The Largest Exporters on The Market and How They Succeed

    1. EXPORTS FROM 2012–2024
    2. EXPORTS BY COUNTRY
    3. EXPORT PRICES BY COUNTRY

  10. 10. PROFILES OF MAJOR PRODUCERS

    The Largest Producers on The Market and Their Profiles

    This Chapter is Available Only for the Professional Edition PRO

  11. 11. COUNTRY PROFILES

    The Largest Markets And Their Profiles

    This Chapter is Available Only for the Professional Edition PRO
    • United States
    • China
    • Japan
    • Germany
    • United Kingdom
    • France
    • Brazil
    • Italy
    • Russian Federation
    • India
    • Canada
    • Australia
    • Republic of Korea
    • Spain
    • Mexico
    • Indonesia
    • Netherlands
    • Turkey
    • Saudi Arabia
    • Switzerland
    • Sweden
    • Nigeria
    • Poland
    • Belgium
    • Argentina
    • Norway
    • Austria
    • Thailand
    • United Arab Emirates
    • Colombia
    • Denmark
    • South Africa
    • Malaysia
    • Israel
    • Singapore
    • Egypt
    • Philippines
    • Finland
    • Chile
    • Ireland
    • Pakistan
    • Greece
    • Portugal
    • Kazakhstan
    • Algeria
    • Czech Republic
    • Qatar
    • Peru
    • Romania
    • Vietnam

  12. LIST OF TABLES

    1. Key Findings In 2024
    2. Market Volume, In Physical Terms, 2012–2024
    3. Market Value, 2012–2024
    4. Per Capita Consumption, By Country, 2018–2024
    5. Production, In Physical Terms, By Country, 2012–2024
    6. Imports, In Physical Terms, By Country, 2012–2024
    7. Imports, In Value Terms, By Country, 2012–2024
    8. Import Prices, By Country Of Destination, 2012–2024
    9. Exports, In Physical Terms, By Country, 2012–2024
    10. Exports, In Value Terms, By Country, 2012–2024
    11. Export Prices, By Country Of Origin, 2012–2024

  13. LIST OF FIGURES

    1. Market Volume, In Physical Terms, 2012–2024
    2. Market Value, 2012–2024
    3. Consumption, By Country, 2024
    4. Market Volume Forecast to 2030
    5. Market Value Forecast to 2030
    6. Products: Market Size And Growth, By Type
    7. Products: Average Per Capita Consumption, By Type
    8. Products: Exports And Growth, By Type
    9. Products: Export Prices And Growth, By Type
    10. Production Volume And Growth
    11. Exports And Growth
    12. Export Prices And Growth
    13. Market Size And Growth
    14. Per Capita Consumption
    15. Imports And Growth
    16. Import Prices
    17. Production, In Physical Terms, 2012–2024
    18. Production, In Value Terms, 2012–2024
    19. Production, By Country, 2024
    20. Production, In Physical Terms, By Country, 2012–2024
    21. Imports, In Physical Terms, 2012–2024
    22. Imports, In Value Terms, 2012–2024
    23. Imports, In Physical Terms, By Country, 2024
    24. Imports, In Physical Terms, By Country, 2012–2024
    25. Imports, In Value Terms, By Country, 2012–2024
    26. Import Prices, By Country, 2012–2024
    27. Exports, In Physical Terms, 2012–2024
    28. Exports, In Value Terms, 2012–2024
    29. Exports, In Physical Terms, By Country, 2024
    30. Exports, In Physical Terms, By Country, 2012–2024
    31. Exports, In Value Terms, By Country, 2012–2024
    32. Export Prices, 2012–2024

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