Fitch Ratings said the Bank of Japan’s decision to raise its policy rate was broadly in line with expectations and should provide a measured lift to Japan’s financial sector, with benefits unevenly distributed between large institutions and smaller regional players.

For the country’s mega banks, the move is expected to support profitability through higher domestic net interest income, reinforcing Fitch’s improving outlook for the sector in 2026. The ratings agency noted that the gradual normalisation of interest rates should allow banks to earn better returns on loans and securities, including Japanese government bonds, while also opening up additional revenue streams such as trading and wealth management.

However, the gains are likely to be tempered by rising deposit costs, greater competition for retail funding and a shift by customers towards time deposits. These pressures are expected to weigh more heavily on regional banks. Fitch also cautioned that higher market rates would lead to valuation losses on domestic bond holdings, though the impact on major banks should be limited due to their relatively short-duration portfolios. Regional lenders, with longer-duration assets, remain more exposed.

A narrowing interest rate gap with overseas markets could strengthen the yen, reducing the value of profits earned abroad when converted back into yen. Credit costs are not expected to rise materially, given the modest scale and pace of the rate increase, although higher borrowing costs could strain smaller corporate borrowers over time.

Fitch also views the rate increase as broadly supportive for Japanese insurers, particularly life companies. Higher interest rates reduce the present value of long-term liabilities, improving economic-based capital positions, while a steeper yen yield curve enhances domestic investment opportunities. Yields on long-dated government bonds have risen sharply in recent years, creating a more favourable reinvestment environment.

Nonetheless, the agency highlighted potential risks. A stronger yen could erode the yen value of income and assets held overseas, while an economic downturn triggered by tighter monetary conditions could prompt a policy reversal, undermining the benefits for insurers. Fitch said the most favourable outcome would be a gradual steepening of the yield curve combined with a relatively weak yen, conditions that will remain under close scrutiny.