Bank of Japan prepares for June rate hike as net income drops on higher reserve interest costs

Bank of Japan officials said on May 27 that Japan’s financial conditions remain easy, supporting the case for a possible rate hike at the June 15‑16 meeting. Director‑General of Monetary Affairs Akio Okuno told parliament that despite rising long‑term yields, negative real rates and strong corporate profits keep the economy able to absorb tighter financing. Governor Kazuo Ueda added historical context, noting that the current Middle East conflict poses a new test for Japan’s inflation regime.

At the same time, the BOJ reported that its fiscal‑2025 net income fell to 1.9 trillion yen from 2.3 trillion yen a year earlier. Rising interest rates have increased payments on excess reserves held by financial institutions to 0.75%, costing the bank 2.7 trillion yen—more than the 2.5 trillion yen earned from government bonds. The higher reserve‑interest expense marked the first time the BOJ’s outflows exceeded bond earnings, highlighting the financial impact of policy normalisation. The central bank’s total asset balance also shrank by 9.1% as bond holdings were reduced.