The winners and losers as interest rates (finally) rise in Japan

• Japan has put an end to its negative interest rates, taking what’s believed to be a first step in putting the economy on a path toward self-sustaining growth, with business investment, consumer prices, and wages all rising in tandem.

• Potential winners of the move include banks, savers, Japanese companies with lots of cash, importers, power-intensive businesses, households, Japanese tourists traveling abroad, and foreign holders of Japanese stocks.

• Potential losers are the Japanese government, the Bank of Japan, Japanese bondholders, homebuyers, renters, real estate companies, “zombie firms”, households with piles of consumer loans, exporters, inbound tourists, and Japanese investors with foreign stocks.

The Bank of Japan (BoJ) has finally delivered its first rate hike since 2007, scrapping the world’s last negative interest rate as well as a whole bunch of other unconventional tools designed to encourage bank lending, spur demand, and fuel inflation. And this once-in-a-generation shift will have huge impacts on Japan’s government, companies, banks, households – and currency. So, let’s take a look at who’ll win – and who’ll lose out – as the country steps into a new era.

First, what does this all mean?

Well, it likely doesn’t mean that Japan is headed for a super-sharp rise in interest rates – akin to the ones the US, UK, and Europe have just endured. Traders are currently betting that Japan’s key interest rate will move up from its current range, near zero, to about 0.3% by the end of the year. So while it’s the start of a small move, rate-wise, it’s a long-anticipated, hugely important step for the economy.

See, for decades, Japan struggled to achieve economic growth. It was saddled with deflation, which had triggered a downward spiral of economic activity. Anticipating that prices were bound to fall, consumers delayed purchases, dampening consumption. Businesses, in turn, lowered production and investment because they couldn’t predict demand. What’s more, falling prices led to lower corporate revenues, hitting profits and preventing firms from raising wages, which further weighed on consumption. And so, in 2016, the BoJ adopted an aggressive effort to fight deflation, dropping its borrowing costs to below zero, encouraging people to borrow and spend, while discouraging them from keeping money in their bank accounts.

But Japan’s economy has recently shown signs of strength. And the end of negative interest rates is believed to be a first step in putting the economy on a path toward self-sustaining growth. The hope now is for a reversal of the deflation era’s effects, with business investment, consumer prices, and wages all rising in tandem.

Who’s this good for (and who’s it bad for)?

Rising interest rates (and, in turn, higher bond yields) will naturally create winners and losers in Japan. And their effects are likely to be amplified by the fact that the BoJ will be increasing rates while other major central banks lower theirs. That divergence is likely to strengthen the yen, as the currency becomes more attractive to international savers and investors. A stronger yen, in turn, will also create winners and losers.

The winners

Although higher interest rates may cause some banks to experience paper losses on their government bond holdings, that’s likely to be more than offset by increased profits from lending activities. With the bulk of loans based on floating rates, changes in the BoJ’s policy rates are likely to have an immediate impact. For example, Japan’s biggest bank, Mitsubishi UFJ Financial Group, had estimated that net interest income at its core banking unit will increase by at least 35 billion yen ($231 million) with the kind of move the BoJ made last week, raising its policy interest rate to 0% from minus 0.1%.

The impact will be even sweeter for local banks: they had over $700 billion in reserves at the central bank that weren’t paying interest, but they’ll now start to earn billions of yen on these deposits. And on the trading front, investment banks are expected to profit from increased client volumes on government bonds and other securities linked to interest rates.

The revival of interest income isn’t just a win for banks – it’s also a boon for savers and most Japanese companies. See, in Japan, corporate savings have been on the rise for more than two decades. But the bulk of these funds had been left in cash, reflecting conservative management styles and concerns about future funding. Even accounting for the surge in share buybacks last year (and excluding financial firms), Japanese businesses have 49% of their net assets in cash, according to JPMorgan.

A yen lifted by higher interest rates would help importers and power-intensive businesses (because Japan imports most of its energy). A stronger currency could also help households by making food and energy imports cheaper. And, of course, Japanese tourists traveling abroad will also benefit.

Finally, a rising yen benefits foreign holders of Japanese stocks, who will see the value of their shares increase when converted back to their home currency.

The losers

The Japanese government might have a tougher time of things, because higher interest rates will raise the cost of servicing existing and future bonds. That’s particularly bad news considering the country’s chunky debt load, which, at more than twice the size of the economy, is the world’s heaviest. Debt-servicing costs exceeded 25 trillion yen ($168 billion) in fiscal 2023, and the finance ministry expects this to jump to 27 trillion yen ($180 billion) in fiscal 2024 – or around a quarter of the government’s annual budget.

Higher interest rates will lower the value of existing Japanese government bonds, resulting in paper losses for the BoJ. That’s because it currently owns around 54% of the nation’s government bonds (worth more than the country’s annual economic output), compared with some 12% in 2013 before the central bank began its massive asset-buying program.

And those paper losses won’t be felt exclusively by the BoJ: they’ll also impact Japanese bondholders more generally.

Homebuyers will see their mortgage rates rise, which could cool the real estate market. See, in Japan, nearly three-quarters of homebuyers opt for floating-rate mortgages that are linked to the BoJ’s short-term interest rates. Higher interest rates, then, will squeeze homeowners and landlords, which could, in turn, raise prices for renters. Local real estate companies would also feel the brunt if those higher mortgage payments scare off potential homebuyers.

The rates situation is likely a tad frightening for companies that have a lot of debt and little-to-no profit – many of which have effectively been on life support, thanks to decades of cheap and easy loans in Japan. Tokyo Shoko Research estimates that there are about 565,000 so-called zombie firms struggling to pay off their debts from profits alone, and just a 0.1 percentage point increase in interest rates would increase that number by about 12% to 632,000. That means a rush of bankruptcies is likely in the months ahead. And it’s not just corporate Japan that’ll feel the pinch: households with piles of consumer loans will also suffer.

Japan’s biggest exporters and companies with a big global presence, such as Toyota, SoftBank, and Tokyo Electron, have benefited from the weakest yen levels in decades – a currency factor that inflates their overseas earnings when converted into yen. But if the currency strengthens on the back of the BoJ’s rate hikes, those earnings tailwinds will flip into reverse.

A stronger yen will also increase the cost for inbound tourists (bad news for me, considering that Japan is on my bucket list). That could, in turn, hit the country’s travel, tourism, and hospitality industries.

Finally, a rising yen will deflate the value of foreign stocks held by Japanese investors.

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