The Bank of Japan is paying the price for its shift in monetary policy. Since abandoning negative interest rates, it has been paying interest to commercial banks on their reserves. As a result, its net profit is plummeting. 📉
🔍 What’s happening?
The BOJ is now paying interest on the reserves that commercial banks hold with it. With the shift to positive rates, this bill is skyrocketing. At the time of writing, the USD/JPY is trading at 159.2329, a direct reflection of this new monetary dynamic.
The Bank of Japan had maintained negative rates for years to stimulate the economy. Those days are over. Normalization comes with an immediate accounting cost. Every basis point paid to banks eats into the BOJ’s net income.
💡 Why does this matter?
For the forex trader, this is a clear signal. A BOJ paying interest on reserves confirms the end of the ultra-accommodative era. The yen is reacting: on USD/JPY, we remain above 159, a sign that the market expects further rate hikes to close the gap with the United States.
This decline in the BOJ’s net profit could also limit its policy flexibility. A central bank that is losing money cannot sustain a massive asset purchase program indefinitely. Japan is entering a new monetary era, one that is more costly for the central bank.
📊 Our view
This is the price of returning to normal. The BOJ waited so long to act that it now finds itself paying cash for its transition.
We see two direct consequences for the coming months. First, the BOJ will have to manage a delicate balance: it cannot raise rates too quickly without deepening its losses even further, but it also cannot keep rates too low in the face of imported inflation and a weak yen. Second, this situation reinforces our belief that USD/JPY remains on an upward trend as long as the Fed keeps rates well above 5%. For European traders, this is also a reminder: the ECB could find itself in a similar situation if it raises its deposit rates too much after having lowered them. Keep an eye on central banks’ balance sheets, not just their press releases.
We expect the BOJ to slow the pace of its rate hikes to limit the accounting damage. For French traders: if you’re trading the yen, favor short USD/JPY positions with tight stops; volatility will remain high.
✅ Key takeaway
- The BOJ is now paying high interest on bank reserves
- Its net profit is falling due to this change in monetary policy
- USD/JPY remains above 159, reflecting the interest rate differential with the United States
- This situation could limit the pace of future Japanese rate hikes
- The return to normalcy is costing the Bank of Japan dearly
What do you think? Do you believe the BOJ will speed up or slow down its rate hikes in the face of this rising bill?
🔎 See also
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Source: Bank of Japan, Investing.com
