The Bank of Japan's decision to raise interest rates to their highest level since 1995 signals a definitive end to decades of ultra-low rates for the world's fourth-largest economy. This normalization of interest rates is reshaping the economic landscape, redrawing the lines between winners and losers among savers, banks, mortgage holders, zombie companies, and the government.
In June, the central bank increased its benchmark rate from 0.75% to 1%. While still extremely low by global standards, this move has a profound impact on millions of Japanese households, businesses, and investors whose major financial decisions were previously based on the assumption that borrowing costs would remain low indefinitely.
The effects of this normalization are already materializing. The nation's three largest banks announced they will raise the interest rate on ordinary deposits from 0.3% to 0.4% starting August 3rd. Meanwhile, the average variable mortgage rate surpassed 1% in April for the first time in 15 years.
Concurrently, credit card delinquency rates are climbing, the number of zombie companies has reached its highest level since the COVID-19 pandemic, and the government faces mounting pressure from expanding debt interest payments.
Savers and Banks: Benefiting from Widening Margins
For Japanese savers holding substantial deposits, rising rates finally offer a tangible return after years of dormancy. Household deposits exceed 1 quadrillion yen (approximately $6.2 trillion), meaning even a modest rate increase generates a significant boost in interest income.
According to calculations by Naoki Hattori, a senior economist at Mizuho Research & Technologies, if the central bank's rate reaches 1%, annual interest income on ordinary deposits would increase by roughly 70 billion yen, with term deposits adding about 80 billion yen. The most significant beneficiaries are elderly households with substantial savings and relatively low debt; families headed by individuals over 70 could see an additional 42,000 yen in annual interest income.
The banking sector is also a major winner in this rate hike cycle. Since the Bank of Japan initiated rate increases in March 2024, the spread between lending and deposit rates has been widening. Data from the Regional Banks Association of Japan shows that listed regional banks' core operating profit for fiscal 2025 grew by approximately 64% compared to two years prior.
However, banks face new challenges. With rising living costs, their ability to pass on higher borrowing costs to customers is limited. Simultaneously, intensified competition for deposits will force banks to raise deposit rates, squeezing profit margins. Hideo Oshima, a senior economist at the Japan Research Institute, notes that some banks may struggle to negotiate higher lending rates with clients, and overly aggressive pricing could heighten credit risks. Furthermore, rising rates depress the market value of bonds held by banks, increasing unrealized losses on their balance sheets.
Mortgage Holders: Facing Stealthy Payment Increases
The impact of rising rates on Japanese mortgage borrowers is significant. Data from the Ministry of Land, Infrastructure, Transport and Tourism indicates over 80% of Japanese mortgages are variable-rate, directly tied to the central bank's policy rate. Before the Bank of Japan ended its negative interest rate policy in March 2024, the average variable mortgage rate at major banks was around 0.4%. By April this year, it had risen to an average of 1.082%. Following the central bank's June rate hike, major banks are expected to raise mortgage rates by about 0.25 percentage points around October.
Japan's "five-year rule" provides borrowers with a short-term buffer, as monthly payments are typically recalculated only every five years. However, for homeowners whose loans are about to enter this recalculation period, payments could see a substantial jump. According to calculations by Takashi Shiozawa of online mortgage broker MFS Inc., the monthly payment on a 50 million yen, 35-year mortgage could increase by over 20,000 yen, reaching approximately 147,000 yen. Hattori estimates that increased payments for mortgages and other loans will impose an additional annual burden of about 500 billion yen on Japanese households.
Pressure is also emerging in the consumer credit sector. Credit card companies, including Credit Saison, have raised rates on some revolving credit products. Data from the Ministry of Economy, Trade and Industry shows Japan's credit card delinquency rate rose to 3.36% in 2025, up from 3.12% the previous year. While still far below the U.S. rate of 12.7%, sustained rate hikes are expected to gradually increase the financial burden on consumers reliant on revolving credit.
Zombie Companies: A Shrinking Lifeline
The end of the ultra-low interest rate era poses a severe threat to zombie companies that have long depended on cheap funding to stay afloat. According to Tokyo Shoko Research, the number of zombie companies in Japan reached 559,000 in fiscal 2024, accounting for 15.2% of all businesses—the highest proportion since the pandemic. The agency warns that if rates rise by an additional 0.3 percentage points from current levels, tens of thousands more companies could fall into zombie status.
Rising borrowing costs will force some vulnerable firms out of the market, causing short-term pain. However, most economists believe this process will help release labor and capital, redirecting resources toward more productive enterprises, which is beneficial for the overall economy in the long run.
Government and Central Bank: Under Dual Fiscal Pressure
For the Japanese government, interest rate normalization comes with a heavy fiscal price. Japan's government debt exceeds twice its GDP, the highest among developed economies. As rates rise, maturing government bonds must be refinanced at higher yields, leading to a continuous climb in debt interest payments. The Ministry of Finance has raised its assumed interest rate for debt servicing costs this fiscal year to 3%, up from 2% last year and the roughly 1.1% average of the past decade.
Under this assumption, the government's debt servicing costs for this fiscal year are projected to exceed 31 trillion yen (approximately $192 billion), accounting for about a quarter of the annual budget. The Ministry of Finance expects this figure to rise further to around 40 trillion yen within three years. Expanding interest payments will constrain the fiscal room for Prime Minister Sanae Takaichi's government to maneuver in priority areas such as economic stimulus, industrial policy, and defense.
The Bank of Japan itself may become an unintended loser in this monetary policy normalization. As rates rise, the central bank must pay more interest on excess reserves held by commercial banks. This expense could eventually surpass the interest income it earns on its holdings of government bonds. Concurrently, rising rates will depress the market value of the central bank's massive bond portfolio, increasing unrealized losses. However, as the Bank of Japan is expected to hold most of these bonds to maturity, the impact of market value fluctuations on its actual financial health is projected to be limited.
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