The Bank of Japan (BOJ) has released estimates projecting potential earnings losses of up to $13 billion if short-term interest rates rise to 2%, highlighting the financial impact of future rate hikes. This marks the first time the BOJ has disclosed such detailed projections, underscoring its commitment to gradually raise rates toward neutral levels.
According to the BOJ’s scenarios, if rates climb to 2% over the next few years and the spread between short- and long-term rates remains narrow (0,25%), the central bank could face annual net losses of around 2 trillion yen ($13 billion) in fiscal 2027 and 2028. However, the losses are expected to taper, with earnings turning positive by fiscal 2031.
The BOJ raised rates to 0.25% in July, and Governor Kazuo Ueda has signaled readiness to continue tightening if inflation sustainably reaches the 2% target. Analysts estimate the neutral rate to be around 1%.
The bank’s earnings model reflects the broader challenge central banks face during tightening cycles - profits shrink as they pay higher interest on reserves to drain market liquidity, while bond yields take time to adjust.
Despite potential short-term losses, the BOJ’s quantitative tightening (QT) plan, which aims to halve monthly Japanese government bond (JGB) purchases to 3 trillion yen by early 2026, reflects a steady approach to normalizing policy. A mid-term review of the QT strategy is scheduled for June next year.