Deposit rates rise after BOJ hike, but pass-through remains limited

2026-08-04

Policy rate at 31-year high

Banks are moving to raise deposit rates. The Bank of Japan lifted its negative rate policy in March 2024 and raised its policy rate to 1.0% at its monetary policy meeting in June this year. Even so, compared with 31 years ago, when the policy rate was at the same level, deposit rates have not risen enough for the normalization of monetary policy to be felt. New deposit rates took effect at many banks on the 3rd, but returns to depositors remain an issue.

Gap between lending and deposits

The policy rate is the benchmark interest rate set by the Bank of Japan, the central bank, as a target for monetary policy. It currently uses the unsecured overnight call rate, the rate for short-term funds borrowed and lent between banks, as its operating target. By raising or lowering this rate, the BOJ adjusts overall interest-rate levels and economic activity.

The policy rate last stood at 1.0% in April 1995, and was cut to 0.5% in September that year to support the economy. Ultra-low rates then continued through the zero-interest-rate policy in February 1999 and the negative-rate policy in February 2016. The turning point came in March 2024, when the BOJ ended its negative-rate policy amid continued gains in wages and prices, and then carried out four rate hikes.

As policy rates rose, banks first moved to lift lending rates. In earnings for the fiscal year ended March 2026, the average lending rate for corporate and retail loans combined was 1.52%, up from the fiscal 2024 result before the removal of negative rates.

Pass-through to depositors remains an issue

A BOJ survey found that about 30% of corporate lending by regional banks was linked to market rates. Under this structure, rises in the benchmark rate are automatically reflected in lending rates. At major banks, the share reaches about 60%. Borrowers on fixed rates are not affected immediately, but companies borrowing on market-linked terms will gradually face higher interest payments.

By bank, Suruga Bank, whose main business is investment property loans, had the highest lending rate at 2.80%. It was followed by Saga Kyoei Bank and Tokyo Star Bank. At the other end, Docomo SMTB Net Bank, formerly SBI Sumishin Net Bank, had the lowest rate, just below 1%. The bank's low rates, driven by its focus on residential mortgages, underscore the intensity of competition among banks.

By contrast, deposit rates remain low relative to lending rates. In fiscal 2026 results before the BOJ raised the policy rate to 1%, banks' average deposit rate was 0.26%. The highest rates are led by new entrants, starting with Orix Bank at 1.53%, followed by Sony Bank and South Korea-backed SBJ Bank. Mizuho Bank had a rate of 0.21%, Sumitomo Mitsui Banking Corp. 0.20%, and Mitsubishi UFJ Bank 0.19%. All applied new deposit rates from the 3rd, but each remained below the average.

Expectations of further hikes

Against a backdrop of higher import prices driven by a weaker yen and stronger dollar, and surging crude oil prices, the market sees the policy rate reaching above 2%. The BOJ kept rates unchanged at its July 31 policy meeting, but Governor Kazuo Ueda said at a press conference the same day that 'if we judge the financial environment to be too accommodative, it could be possible to speed up the pace of rate hikes.'

For financial institutions, deposit rates are a funding cost. Raising them requires stable earning power. Regional banks and shinkin banks, among smaller lenders, would struggle to compete with Japan Post Bank and the major banks, which have greater financial strength, unless they review their cost structure. Internet banks can offer high deposit rates because they have established a lean business model without physical branches.

According to the BOJ, in April-August 1995, when the policy rate was 1.0%, the average rate on one-year time deposits was about 1% regardless of deposit amount, while five-year deposits averaged about 2.5%. New deposit rates reflecting the BOJ's rate hike took effect on the 3rd this month, and one-year time deposits were set at 0.5%. Even including smaller financial institutions, passing on the benefit to depositors remains a task unfinished.

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