BOJ Set to Hike Rates Again Amid Shrinking Reserves

The Bank of Japan (BOJ) is set to raise its policy rate by 25 basis points to 1.25%, according to a Reuters poll of 68 economists, with 66 expecting this move on September 18.

This would be the second increase in two months, following a quarter-point hike in June, when the BOJ guided the overnight call rate to around 1.0% and applied the same rate to the complementary deposit facility, excluding required reserve balances.

The interest paid on excess reserve balances has more than doubled since last year's fiscal year, from ¥1.2517 trillion to ¥2.7105 billion, surpassing interest earned on Japanese government securities (JGBs) for the first time in fiscal 2025.

A rate hike would again raise the rate paid on excess reserve balances, but a smaller eligible balance due to shrinking reserves could offset this increase. The BOJ's balance sheet has contracted by ¥47.1 trillion since March 31, with current deposits falling to ¥412.66 trillion and JGB holdings decreasing by ¥11.2 trillion.