Winners and Losers in Japan’s Era of High Interest Rates

```

The Bank of Japan has raised interest rates to the highest level since 1995, marking the official end of decades of ultra-low interest rates for the world’s fourth largest economy. The normalization of interest rates is reshaping the interests within the Japanese economy, redrawing the boundaries between winners and losers among depositors, banks, mortgage borrowers, zombie companies, and the government.

In June, the Bank of Japan raised its benchmark rate from 0.75% to 1%. Although this is still extremely low by global standards, the move has deeply affected millions of Japanese households, businesses, and investors—all of whose major financial decisions were previously based on the assumption that borrowing costs would stay low for a long time.

The impact of returning to normalized interest rates is already starting to show. Japan’s three largest banks announced they will raise ordinary deposit rates from 0.3% to 0.4% starting August 3. The average floating mortgage rate surpassed 1% in April this year, breaking that threshold for the first time in 15 years.

Meanwhile, credit card delinquency rates are rising, the number of zombie companies has reached its highest since the pandemic, and government debt interest payments are facing continued expansion pressures.

Depositors and Banks: Enjoying the Benefits of Widened Interest Spreads

For Japanese savers holding huge deposits, rising interest rates mean a genuine return after years of stagnation. Japanese households have deposits totaling over 1,000 trillion yen (about $6.2 trillion USD); even a slight rate increase brings considerable extra interest income.

According to estimates by Naoki Hattori, Senior Economist at Mizuho Research & Technologies, with central bank rates at 1%, annual interest income from ordinary deposits will increase by about 70 billion yen, and term deposits by about 80 billion yen. The most obvious beneficiaries are elderly households with more savings and fewer debts—households headed by those over 70 are expected to gain about 42,000 yen extra per year in interest income.

Banks are also among the biggest beneficiaries in this round of rate hikes. Since the Bank of Japan began raising rates in March 2024, the interest spread between loans and deposits has continued to widen. According to the Japanese Regional Bank Association, the core operating profit of listed regional banks for fiscal 2025 has increased by about 64% compared to two years ago.

However, banks face new pressures. Amid rising living costs, the scope for passing higher borrowing costs to customers is limited; meanwhile, intensified deposit competition is pushing banks to raise deposit rates, squeezing profit margins. Hideo Oshima, Senior Economist at Japan Research Institute, points out, "Some banks may find it difficult to negotiate loan rate increases with clients, and aggressive pricing could increase credit risk." Additionally, rising rates lower the market value of bonds held by banks, expanding unrealized losses on their balance sheets.

Mortgage Borrowers: Repayment Pressure Is Quietly Rising

The impact of rising rates on Japanese mortgage borrowers is not to be underestimated. According to the Ministry of Land, Infrastructure, Transport and Tourism, over 80% of Japanese mortgages have floating rates directly linked to central bank policy rates. Before the Bank of Japan ended its negative rate policy in March 2024, the average floating mortgage rate at the big three banks was about 0.4%; by April this year, it had risen to an average of 1.082%. With the June rate increase, major banks are expected to further raise mortgage rates by 0.25 percentage points around October.

Japan’s “five-year rule” gives borrowers some short-term cushioning—monthly payments are usually recalculated every five years. But for homeowners whose loans are about to enter a recalculation period, repayments could jump sharply. According to Takashi Shiozawa at online mortgage broker MFS Inc., the monthly payment on a 50 million yen, 35-year loan could increase by over 20,000 yen, rising to around 147,000 yen. Hattori estimates that the combined increase in mortgage and other loan repayments will mean Japanese households bear about 500 billion yen extra in annual spending.

Signs of strain are also visible in consumer credit. Credit card companies, such as Credit Saison, have already raised rates on some revolving credit products. Data from the Ministry of Economy, Trade and Industry shows Japan’s credit card delinquency rate will rise to 3.36% in 2025, up from 3.12% last year—still well below America’s 12.7%, but continued rate hikes may gradually increase the financial burden for consumers dependent on revolving credit.

Zombie Companies: Shrinking Survival Space

The end of the ultra-low rate era is a severe threat to zombie companies that rely on cheap funding to survive. According to Tokyo Shoko Research, the number of zombie companies in Japan will reach 559,000 in fiscal 2024, 15.2% of all companies, the highest proportion since the pandemic. The agency warns that if rates rise another 0.3 percentage points from here, tens of thousands of companies could fall into zombie status.

Rising borrowing costs will force some fragile companies out of the market, causing short-term pain. However, most economists believe this will help free up labor and capital, pushing resources toward more efficient companies—a process beneficial to the economy in the long run.

Government and Central Bank: Dual Pressure on Fiscal Space

For the Japanese government, normalized rates mean a heavy fiscal price. Government debt exceeds twice the nation’s GDP, the highest among developed economies. As rates rise, maturing government bonds must be refinanced at higher yields, causing interest payments on debt to climb. The Ministry of Finance has raised its assumed interest rate for debt repayment this fiscal year to 3%, above last year's 2% and the roughly 1.1% average over the past decade.

Under these assumptions, this fiscal year's debt repayment costs are expected to surpass 31 trillion yen (about $192 billion USD), or roughly a quarter of the annual budget. The ministry expects this figure to rise further to about 40 trillion yen within three years. Rising interest payments will squeeze the space Prime Minister Sanae Takaichi’s government has for economic stimulus, industrial policy, and defense spending.

The Bank of Japan itself could also become an "unexpected loser" of this round of monetary policy normalization. As rates rise, the central bank must pay more interest on excess reserves to commercial banks, and these payments may ultimately exceed the interest income from its government bond holdings. Meanwhile, rising rates reduce the market value of the bank’s massive bond portfolio, expanding unrealized losses. Still, since the central bank intends to hold most bonds to maturity, market value fluctuations should have little real impact on its financial position.

Risk Warning and DisclaimerThe market carries risks, and investments require caution. This article does not constitute personal investment advice, nor does it take into account any individual user’s investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their specific situation. Investments based on this article are at your own risk. ```