Impact of Bank of Japan's Interest Rate Hike: Lending Rates Hit 12-Year High

Interest rates surge as Japan's central bank continues policy tightening

Japan's domestic banks have seen new lending rates reach their highest levels in 12 years, driven by a series of interest rate hikes by the Bank of Japan (BOJ). According to a report by Nikkei on February 14, 2025, the average interest rate for new loans by Japanese banks in December 2024 reached 1.132%, marking the highest level since April 2013. The rising rates are a direct result of the BOJ's policy decisions, which have been pushing up borrowing costs for businesses and individuals alike.

The most significant increases have been observed in short-term lending rates. In December 2024, the average rate for new short-term loans at nationwide banks jumped from 0.495% in November to 0.668%, while regional banks saw even larger increases, from 0.574% to 1.054% over the same period. This uptick in borrowing costs comes after the BOJ raised its short-term policy rate in January, following its first rate hike in six months. This decision, which brought the rate from 0.25% to 0.5%, marked a return to the highest levels of short-term interest rates in Japan since the 2008 financial crisis.

The Bank of Japan's policy shift began in March 2023 when it ended its negative interest rate policy, hiking rates for the first time in 17 years. By July 2023, the BOJ had further raised rates to around 0.25%, signaling its intention to tighten monetary policy further in response to rising inflationary pressures.

As the BOJ continues its tightening cycle, Japan’s commercial banks and regional lenders have been quick to adjust their loan rates to reflect the central bank's decisions. This has resulted in a significant increase in their profits, with major banks like Chiba Bank and Mebuki Financial Group reporting record earnings. Chiba Bank's net profit for the period from April to December 2024 surged 9% year-on-year to 54.5 billion yen, while Mebuki Financial Group saw a remarkable 52% increase, reaching 49.1 billion yen.

The higher lending rates have also coincided with a strong demand for corporate loans in Japan. Bank loans in the country increased by 3.3% year-on-year, reaching approximately 557 trillion yen in December 2024. This surge in borrowing has been driven by robust corporate demand, particularly for mergers and acquisitions (M&A) financing. According to Tsuyoshi Ueno, Chief Economist at Nissei Research Institute, corporate loans have remained strong, particularly in the M&A sector.

However, while higher loan rates benefit banks’ profitability, they create challenges for small and medium-sized enterprises (SMEs), which may struggle with the rising cost of borrowing. The potential for further interest rate hikes by the BOJ could exacerbate this issue, leading to an even higher burden on businesses relying on credit for growth and operations. Nikkei forecasts that commercial banks may continue raising their lending rates in the near future, further impacting SMEs’ financial burdens.

As Japan's central bank continues to raise interest rates, the nation's economy will have to adjust to a higher cost of borrowing, while banks stand to benefit from the increased interest income. However, the long-term effects on SMEs and consumer spending could pose risks to the country's economic stability, as higher lending rates weigh on the ability of businesses to invest and grow.