Japan's largest banks say corporate demand for loans is still growing, even after the Bank of Japan (BOJ) raised its key interest rate to 1.25% on September 18. The finding comes from a central bank survey published Thursday, and it suggests that higher borrowing costs have not yet cooled business appetite for credit.
The survey, which ran from September 9 through October 13, asked major banks whether they are seeing more or fewer companies seeking loans. The resulting diffusion index for corporate funding demand came in at +3, up from -1 three months earlier. A positive reading means more banks reported rising demand than falling demand. In plain terms, it indicates that businesses are still willing to borrow despite the higher cost of money.
Why the BOJ is watching this number
The BOJ has said it is closely monitoring business funding conditions as it tries to judge how close interest rates are to "neutral" — the level that neither stimulates nor restricts economic growth. If companies keep borrowing even as loans become more expensive, that suggests policy is not yet tight enough to slow the economy meaningfully.
That matters because the central bank is trying to keep inflation from overshooting its 2% target. Japan has spent years fighting deflation, but now the challenge is different: prices are rising at a pace that, if left unchecked, could erode purchasing power. The BOJ has been gradually raising rates to prevent inflation from getting out of hand, but it wants to avoid going too far and choking off growth.
The latest survey reading is a signal that the economy can still absorb higher rates. "A +3 diffusion index after a 1.25% policy rate can be read as a sign policy still isn't meaningfully restrictive," said one market analyst, "since companies are accepting the new cost of money."
What this means for markets
For investors, the key takeaway is that the BOJ may have more room to tighten policy than some had assumed. If firms keep borrowing despite pricier loans, markets may conclude that the central bank can push rates higher still, as it tries to keep inflation anchored at its 2% target.
That expectation often shifts attention from the latest hike to where rates ultimately peak. Traders may start pricing in a higher terminal rate, which tends to push up yields on short-dated Japanese government bonds. If investors believe Japan's rate path will be steeper relative to other countries, that interest-rate gap can also tilt expectations toward a firmer yen.
The BOJ's December meeting is already in focus, with some market participants seeing a decent chance of another hike. A resilient borrowing picture strengthens the case for those who expect the central bank to move again before year-end.
What it means for everyday investors
For ordinary investors, the BOJ's rate path has ripple effects well beyond Japan. Japanese government bond yields influence global borrowing costs, and a firmer yen can affect the profits of Japanese exporters, which in turn moves the Nikkei and other Japanese equities. If you hold international funds or stocks with exposure to Japan, these developments matter.
Higher Japanese rates could also make yen-denominated assets more attractive, potentially drawing capital away from other markets. That said, the BOJ is moving cautiously, and the survey is just one data point. The central bank will be watching a range of indicators, including inflation, wage growth, and the broader economy, before deciding its next move.
For now, the message from Japan's banks is clear: businesses are still borrowing, and that suggests the cost of money has not yet become a serious drag. Whether that holds as rates climb further is the question investors will be watching in the months ahead.
