BOJ Faces Potential $12.7 Billion Annual Loss at 2% Interest Rate

The Bank of Japan may incur a net loss of up to ¥2 trillion ($12.7 billion) in FY2027 or FY2028 if it raises its short-term policy rate to 2%. The estimate assumes a 75 basis point yearly increase in the rate and a 25 basis point spread between the short-term and long-term bond rates. This is the first financial loss projection by the BOJ.

The Bank of Japan (BOJ) is contemplating raising its short-term policy rate, which could result in a net loss of up to ¥2 trillion ($12.7 billion) in FY2027 or FY2028 [1]. This financial loss projection is the first of its kind by the BOJ and has significant implications for both major and regional banks in Japan.

Japan's largest banks, such as MUFJ, SMFG, and Mizuho, are expected to benefit the most from the possible end to negative interest rates in 2024 [1]. These banks have greater flexibility to pass higher rates to their customers, which could result in increased net interest income [1]. For instance, MUFG and Mizuho Financial estimate that a 10-basis-point increase in short-term rates would boost their annual net interest income by ¥35 billion and ¥940 billion, respectively [1].

However, smaller regional banks face mixed feelings about the potential rate hike [1]. While they may also stand to benefit from higher net interest income, they are more reliant on offering rock-bottom rates to a customer segment that is more sensitive to interest rate changes, such as small local businesses [1]. As a result, these banks have lesser flexibility on their spreads, which could limit their ability to fully capitalize on the potential benefits of higher interest rates.

The BOJ's decision to raise interest rates also carries risks for the broader economy. Japan has been grappling with deflation for several years, and some analysts argue that the central bank should prioritize maintaining low interest rates to support economic growth [2]. Additionally, the potential financial loss from interest rate hikes could undermine the BOJ's credibility and lead to market volatility.

In conclusion, the Bank of Japan's potential financial loss from raising interest rates is a significant development that has implications for both major and regional banks in Japan. While larger banks may stand to benefit from higher net interest income, smaller regional banks face challenges due to their limited flexibility on spreads. The BOJ must carefully weigh these factors and consider the potential risks to the broader economy before making a decision on interest rates.

References:
[1] "Japan's monetary policy change likely to favor major banks more," S&P Global Market Intelligence, 25 January 2023, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/japan-s-monetary-policy-change-likely-to-favor-major-banks-more-79880384
[2] "Japan's deflationary spiral: Can the BOJ break the cycle?," Reuters, 10 February 2023, https://www.reuters.com/business/finance/japans-deflationary-spiral-can-the-boj-break-the-cycle-2023-02-10/