“The Era of Ultralow Rates and Deflation Is Over”: Japanese Bank Stocks Take Flight on BOJ Tightening, but Households and Bond Market Face Aftershocks

Japanese bank stocks rally sharply amid BOJ tightening
“Prices, wages and property all rise” as deflation recedes
Rate hikes roil financial markets, prompting Japanese government intervention

Bank stocks traced a broad upward trajectory on the Tokyo Stock Exchange. The gains reflected growing expectations of wider lending margins and stronger investment income as the Bank of Japan (BOJ) delivered a series of interest-rate increases amid signs that deflation was receding. The market shifts triggered by monetary tightening extend well beyond equities. Japanese government bond yields remain elevated, particularly at the long end, while borrowing costs across the economy—including household loan interest—continue to rise.

Japanese Bank Stocks Rally

According to a Nikkei report on September 14, all 25 banking stocks in the Tokyo Stock Exchange’s sectoral index rose that day. The gains stood in sharp contrast to the broader market’s weakness, with the Nikkei 225 closing down 518.35 points, or 0.81%, at 63,492.99. Mitsubishi UFJ Financial Group (MUFG), Japan’s largest financial group, closed 1.61% higher at approximately $23.25. Sumitomo Mitsui Financial Group (SMFG) gained about 1.7% to approximately $43.94, while Mizuho Financial Group finished 0.8% higher at approximately $54.51.

Buying also spread to midsized financial groups and regional banks. Resona Holdings climbed to approximately $15.88, Chiba Bank to approximately $17.32 and Shizuoka Financial Group to approximately $22.43. The strength of the rally becomes even more pronounced when prices are compared with levels at the beginning of the year. Nikkei reported that Japan’s banking-stock index had gained approximately 50% year to date, nearly double the roughly 26% increase in the Nikkei average over the same period. The momentum rivals that of Tokyo Electron and other major technology stocks that led the Japanese market’s rally in the first half.

BOJ’s Rate-Hike Campaign

Japanese bank stocks are strengthening as the country’s rate-hike cycle gathers pace. The BOJ first introduced its zero-interest-rate policy in February 1999, guiding the uncollateralized overnight call rate—its policy benchmark—to effectively zero. After temporarily ending the policy in August 2000, it resumed quantitative easing in March 2001. In October 2010, the central bank introduced comprehensive monetary easing, setting a target range of 0%–0.1% for short-term rates. It then adopted quantitative and qualitative monetary easing (QQE) in 2013, sharply expanding purchases of long-term government bonds and exchange-traded funds (ETFs). In January 2016, the BOJ formally introduced a negative-interest-rate policy, applying an annual rate of minus 0.1% to a portion of the current-account balances held by financial institutions at the central bank. In September of the same year, it introduced yield curve control (YCC), targeting the 10-year government bond yield at around 0%.

The policy landscape reversed in 2024. At its March 2024 Monetary Policy Meeting, the BOJ ended the negative-interest-rate policy it had maintained for eight years since 2016 and set the target range for the uncollateralized overnight call rate at 0%–0.1%. It simultaneously abolished YCC and halted new purchases of ETFs and Japanese real estate investment trusts (J-REITs), bringing the prolonged era of large-scale monetary easing to an end. The policy rate was raised to 0.25% in July of the same year, followed by increases of 0.25 percentage points in January and December last year. The upward trajectory continued this year. The BOJ raised the policy rate from 0.75% to 1.0% in June, its highest level in 31 years. Although the central bank left the rate unchanged at its July Monetary Policy Meeting, it reaffirmed its existing stance that month, stating, “If the outlook for economic activity and prices is realized, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation.”

Emerging From the Deflationary Tunnel

The BOJ’s tightening campaign has been underpinned by signs that the Japanese economy is emerging from deflation. Wages, consumer prices and property values have all been trending upward. According to Rengo, Japan’s largest labor union federation, unions affiliated with the organization secured an average wage increase of 5.01% in this year’s shunto, the annual spring wage negotiations between Japanese labor unions and employers. The figure remained above 5% for a third consecutive year. Monthly wage indicators also showed a marked improvement. Japan’s nominal wages increased 4.7% year over year in July, while scheduled cash earnings, which correspond to base pay, rose 4.1%, their strongest increase since 1992. Real wages also expanded 2.4% that month, extending their positive streak to seven consecutive months.

Upward price pressures are also persisting. According to Japan’s Ministry of Internal Affairs and Communications, the consumer price index (CPI) rose 1.9% year over year in July, while core CPI excluding fresh food increased 1.8%. The property market likewise maintained its strength. According to the Ministry of Land, Infrastructure, Transport and Tourism’s 2026 official land-price data, average nationwide land prices as of January 1 rose 2.8% from a year earlier, marking a fifth consecutive annual increase. Residential land prices climbed 2.1%, commercial land prices rose 4.3% and land prices across Japan’s three major metropolitan areas advanced 4.6%. The average price of a new condominium in the greater Tokyo area—including Tokyo, Kanagawa, Saitama and Chiba—rose 13.1% year over year to approximately $633,438 in the first half, surpassing $625,000 for the first time. The average price across Tokyo’s 23 wards also reached a record high of approximately $890,563, up 9.1%.

Table 1. Indicators of Japan’s Emergence From Deflation

Household Interest Burden Mounts

The successive rate increases have brought sweeping changes to financial markets, most notably by increasing households’ interest burdens. According to Flat 35, the Japan Housing Finance Agency’s mortgage-rate disclosure website, the modal rate most frequently offered by financial institutions for 21- to 35-year fixed-rate mortgages stood at 3.46% as of September 8, based on a loan-to-value ratio of 90% or less. The rate, which remained in the upper-1% range through the end of last year, has nearly doubled in just over a year. Variable rates are also rising in tandem. Sumitomo Mitsui Banking Corporation’s preferential variable rate for new mortgages stood at 1.525% this month. The increase is exceptional for Japan, where ultralow rates of around 0.5% were commonplace only a few years ago.

Borrowers who purchased homes with large, long-term, low-cost loans have seen their finances pushed to the brink. Kansai TV reported on September 8, “The longstanding era of ultralow interest rates has ended, ushering in circumstances in which conventional assumptions about rates no longer apply,” adding that “rising mortgage rates are placing a burden on borrowers’ lives.” A man in his 60s who purchased a $262,500 home with a variable-rate mortgage 15 years ago told Kansai TV, “My loan payments have recently increased because of rising interest rates and now exceed $625 a month.” He added, “I considered taking a part-time job after retirement, but finding work is not easy once you are over 60.”

JGB Yields Also Surge

The bond market has also reacted immediately to the rate-hike cycle. The yield on Japan’s 10-year government bond surged to 3.017% on September 2 and has since fluctuated in the upper-2.9% range, while yields on other long-dated bonds have climbed to around 4%. These moves differ sharply from those seen during the ultralow-rate era. The Japanese government is consequently discussing a succession of measures to broaden the investor base for government bonds and minimize market disruption. One prominent proposal is a review of asset allocation at the Government Pension Investment Fund (GPIF), the world’s largest public pension fund. Japanese Finance Minister Satsuki Katayama said in July, “If the GPIF’s investment environment changes significantly, its basic portfolio must be reviewed appropriately,” adding that “the domestic bond allocation, which currently accounts for approximately one-quarter of the portfolio, is not fixed.” Speculation has since spread that the GPIF could increase its holdings of Japanese government bonds.

Discussions are also under way on regulatory changes intended to channel household funds into the government bond market. The Japanese government and ruling parties are considering making government bonds for retail investors eligible for the Nippon Individual Savings Account (NISA), reducing taxes on interest income and capital gains while lowering the inheritance-tax burden. One market expert said, “If the GPIF increases its domestic bond allocation or household funds move from overseas financial products into Japanese government bonds, the resulting demand could ease upward pressure on bond yields and raise the value of the yen.” The expert added, “However, renewed yen weakness could be triggered by inflationary pressure from high oil prices and a widening trade deficit. If that occurs, the likelihood of additional interest-rate increases would also rise.”