Japan’s policy rate may rise to 0.25% by end-2025: Fitch

Regional banks will not benefit much from rising interest rates, however.

The Bank of Japan (BOJ) is expected to further raise its interest rate policy to 0.25% over the next two years, reports Fitch Ratings.

Japan’s central bank recently made the historic move to break away from its negative interest rate policy, raising its benchmark uncollateralised overnight call rate to 0% to 0.1%.

This expected higher policy rate, together with the tightening of Japan’s monetary policy, should help raise domestic net interest margins (NIMs) amongst Japanese banks, Fitch said in a commentary.

“Profitability is the weakest aspect of our rated banks’ standalone credit profiles, but higher domestic lending NIMs should support overall profitability, even considering the banks’ plans to raise deposit rates,” Fitch noted.

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Higher re-investment yields on securities, such as Japanese government bonds (JGBs), will also enhance profitability, the ratings agency added– provided policy rates are held at a higher level over the medium term than expected.

Regional banks’ profits will benefit less from megabanks, as they may be more hesitant to raise interest rates. Their market risk is also greater due to their loans having a longer tenor, which in turn exposes them to greater valuation losses as NIMs rise.

Overall, Fitch Ratings said that rates would have to increase well above its projected levels in 2024-2025 to affect the profitability factor in its assessments of the banks’ credit profiles.

Other factors are also expected to continue to weigh on profitability, partially offsetting the lift from higher NIMs. 

“These include short-term realised valuation losses on existing Japanese securities portfolios, potential adverse exchange-rate effects on operating profits earned outside of Japan if higher rates strengthen the yen, and higher credit costs,” Fitch Ratings said.

“If Japan experiences structurally higher inflation and wage growth, this may also complicate banks’ efforts to rein in their costs,” Fitch warned.