Japanese banking industry warns: rising Japanese bond yields may trigger writedowns and profit shocks

According to Jinzi Finance APP, Japan's main banking industry organization has warned that Japanese government bond yields may continue to rise, putting banks at risk of asset write-downs and profit losses. Masahiko Kato, Chairman of the Japanese Bankers Association and President of Mizuho Bank, stated at a press conference on Thursday that the continued rise in Japanese government bond yields could lead to asset write-downs and realized losses. He noted that until the outlook for yields becomes clearer and policy rates have peaked, banks may not rush to increase their holdings of Japanese government bonds.

Over the past two years, rising interest rates have boosted large Japanese banks to record profits by widening loan profit margins. However, at the same time, as yields have surged, unrealized losses on Japanese government bonds held by these banks have continued to increase. So far, this has not caused significant problems because the banks have been able to hold these bonds to maturity.

Japan's top financial regulator said this month that they are closely monitoring whether banks are properly managing the risks posed by rising interest rates to all of their businesses, including bond holdings, corporate lending, and ultra-long-term mortgages. Financial Services Agency Commissioner Toyo Ito said in an interview that, overall, the industry’s book losses are at a "controllable level" and that regulators will not direct banks or other institutions on how to specifically handle these losses.

The yield on Japan's 10-year government bonds recently touched 3%, a new 30-year high. Amid rising fiscal concerns, investors expect the Bank of Japan to further raise interest rates. The market widely anticipates that the Bank of Japan will raise its policy rate to 1.25% on Friday.

Kato stated that key interest rates remain accommodative, and he expects the Bank of Japan to further increase rates. He also expressed hope that Prime Minister Sanae Takaichi’s new cabinet will implement policies that support sustainable national growth and financial market stability.

According to reports, Japanese Prime Minister Sanae Takaichi retained core members in the cabinet reshuffle announced on Thursday. This is her first cabinet reshuffle since taking office in October 2025. Analysts believe that, amid persistently low cabinet approval ratings, Takaichi has consolidated her administration by including members from the Innovation Party, paving the way for the autumn parliamentary agenda.