Japanese Companies Feel the Heat of Rising Interest Rates

The Bank of Japan (BOJ) lifted its policy rate to a 31‑year high last month, ending years of negative rates. This change has put pressure on many firms in Japan. About half of the companies surveyed reported that the higher borrowing costs hurt their profits and slowed new investments. Only a small fraction—around five percent—felt the impact as strong and immediate. Most businesses, roughly forty‑four percent, saw a moderate negative effect, while nearly half said there was no noticeable change. A few companies even noted some benefit from the higher rates, possibly because they were able to refinance debt more cheaply. A machinery manufacturer highlighted that its interest payments have already risen sharply and warned that further hikes could severely affect its operations. When asked when a next increase would be most welcome, respondents split the difference: some preferred the current quarter, others looked to late 2024 or even 2027, and a sizable group said no further hikes would be desirable.

The BOJ’s next policy meeting is slated for the end of July. Companies anticipate that rates above one‑and‑a‑half percent would dampen capital spending, and many have already begun cutting back on new projects. A transportation firm emphasized the difficulty of shifting from a low‑rate mindset to dealing with higher loan costs. The yen’s decline against the dollar also plays a role. While exporters benefit from stronger overseas earnings, importers face higher costs for raw materials and food, especially as global oil prices rise due to geopolitical tensions. Roughly one third of firms see the weak yen positively, but more than half view it negatively. Only a minority of companies plan to adjust their expected dollar‑yen exchange rates for the coming year. Most keep their current assumptions unchanged, though a quarter are considering changes to reflect the currency’s weakness. Japan’s government spent record amounts in early spring to support the yen, but the intervention was short‑lived. The currency fell again, reaching a 40‑year low in early July.

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