BOJ reserve payments threaten to break bank

Tokyo

THE Bank of Japan (BOJ) is flagging a source of losses as it plots an exit from bond-buying stimulus: a surge in the interest it pays banks for their reserves.

Deputy governor Kikuo Iwata said last week that there is potential for those payments to exceed income on the central bank's bond holdings as it exits from quantitative easing. If the interest rate on reserves is raised to 2 per cent from 0.1 per cent, matching the BOJ inflation target, the cost could swell to as much as eight trillion yen (S$90.5 billion) annually by the end of 2017, according to Barclays plc. That could swallow the bank's capital base and require a taxpayer bailout, it said.