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| Bank of Japan headquarters. (Source: Getty Images) |
On October 20, the BoJ released its biannual Financial System Report, assessing the health of Japan's financial ecosystem. Accordingly, despite increased instability in the financial sectors in the US and Europe in March 2023, the country's financial system remains healthy and stable.
Report warns of potential global recession amid rising interest rates.
Notably, the report said that Japanese banks' total income would likely improve if domestic interest rates rose by 1 percentage point, as the profit spread from interest rates far outweighed the temporary losses from holding bonds.
Accordingly, the BoJ estimated the interest rate risks in the latest financial system report to be worth about 3,000 billion yen ($20 billion), noting that basic deposits will offset the risks.
“Asset risks tend to be the focus of market attention, but the situation is generally balanced,” a BoJ official said.
The news comes amid growing speculation about when the BoJ will end its negative interest rate policy. Bond holdings lose value if interest rates rise, and Japanese banks are expected to incur increasing unrealized losses for about a year after rates rise.
However, the BoJ assesses that, after a few years, the market value of the distressed bonds will improve as they approach maturity.
Meanwhile, banks can easily make profits in a rising interest rate environment. According to the BoJ, large banks will see an increase in net interest income immediately after interest rates rise.
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