BOJ Financial System Report: Firms' Resilience to Rates Improving, but Wide Gaps Among SMEsThe Bank of Japan checked how money is flowing between banks and companies
On October 23, 2026, the Bank of Japan published its Financial System Report (October 2026 issue). It assesses that Japan's financial system is maintaining stability on the whole, and that financial institutions have continued to improve their core profitability while losses such as credit costs have been contained. Corporate bankruptcies and default rates remain above pre-pandemic levels but have moved broadly sideways, and with improvements in interest coverage ratios and debt ratios, the report states that firms' resilience to interest rates has strengthened overall.
- ○Applies: The financial system is maintaining stability on the whole
- ○Applies: Core profitability at financial institutions keeps improving
- ○Applies: Firms' resilience to interest rates has strengthened overall
- ×Does not apply: Gaps among SMEs are wide and downward pressure on profits remains
Key points
- The report assesses that Japan's financial system is maintaining stability on the whole
- Losses such as credit costs at financial institutions have been contained, and core profitability has continued to improve
- Corporate bankruptcies and default rates are above pre-pandemic levels but have moved broadly sideways
- With improvements in interest coverage ratios and debt ratios, firms' resilience to interest rates has strengthened overall
- Higher raw material and energy prices are seen as pushing down profits, mainly at small and medium-sized enterprises
What to do in practice
- Identify whether your borrowings carry fixed or floating rates, and estimate how much interest expense would rise if rates went up
- Calculate your own interest coverage ratio (operating profit divided by interest expense) so you are ready to discuss it with your bank
Twice a year the Bank of Japan publishes the results of a check-up called the Financial System Report. In the October 2026 report, the verdict was that the flow of money among Japan's banks and companies is calm on the whole. Banks' earnings are growing, and companies are gaining the strength to pay interest on what they have borrowed. However, at smaller companies, many are earning less because materials, electricity and gas have become more expensive, so the gaps between companies are wide.
- 1 BanksAre they earning, and are their losses growing too large?
- 2 CompaniesCan they pay interest, and are more of them going under?
- 3 Smaller firmsAre their profits shrinking because materials and energy cost more?
- 4 OverallDeciding whether the flow of money is calm or not
Points
- The flow of money in Japan was judged to be calm on the whole
- Banks' earnings from their main business keep growing
- At smaller companies, many are earning less because materials, electricity and gas cost more
What the words mean
- Financial system
- The whole mechanism through which money moves among banks, companies and households
- Resilience to interest rates
- The ability of a borrower to keep paying even if interest rates rise
- Bank of Japan: Bank of Japan: Financial System Report (October 2026)
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