Interest rates have risen to their highest level in over three decades, yet businesses' willingness to borrow remains high. A recent survey by the Bank of Japan shows that large banks perceive corporate funding demand to have increased rather than decreased, signaling that monetary tightening has not yet truly translated into real-economy financing and making the timing of the next interest rate hike even more uncertain.

Businesses' need for funds is rising, and interest rate hikes do not seem to have "taken effect" yet.

A survey released by the Bank of Japan on Thursday (October 22) showed that major banks reported increased demand for funds from corporate borrowers compared to three months ago. This result surprisingly suggests that the central bank's recent interest rate hikes have not tightened financial conditions; on the contrary, companies' willingness to borrow has become stronger. In the survey, conducted between September 9 and October 13, the diffusion index, which measures the difference between the proportion of major banks that believe corporate demand for funds has increased and those that believe demand has decreased, was +3, compared to -1 three months ago. A positive index reading means that the number of banks believing corporate demand for funds has increased is greater than the number believing demand has decreased. In other words, financial institutions intuitively perceive that corporate enthusiasm for financing has not cooled despite higher interest rates.

Financial conditions have become a key signal for predicting the next interest rate hike.

Currently, financial conditions are playing an increasingly important role in predicting the timing of the Bank of Japan's next interest rate hike. The Bank of Japan has previously stated that it will carefully examine how past interest rate hikes have affected corporate financing in order to assess how far its policy rate is from a level considered neutral to the economy. The neutral interest rate refers to a level that neither excessively stimulates nor excessively inhibits economic growth. Judging whether the central bank's current interest rate is close to this level largely depends on the actual reaction on the financing side. This latest survey provides the market with a window into this: since corporate demand for funds remains strong, it may indicate that the policy rate is not yet high enough to suppress lending activity. This corroborates the survey data's reflection that "financial conditions remain relatively loose," and also leaves room for the central bank to continue tightening.

Interest rates rise to 31-year high; policy focus shifts to preventing inflation.

Just recently, on September 18th, the Bank of Japan raised its policy rate to 1.25%, the highest level in 31 years, and clearly indicated that its policy focus was shifting towards a preventative approach, specifically targeting the potential risk of inflation exceeding its 2% target. This statement contrasts with its past cautious style of "gradual, small-scale increases," and signifies that the central bank is no longer content with merely a mild response, but is more vigilant about the risk of runaway inflation expectations. This "divergence" between corporate financing demand and the policy rate highlights the delicate situation the Bank of Japan currently finds itself in: on the one hand, interest rates are already high, and further rate hikes would increase the risk of economic slowdown; on the other hand, financing demand has not yet shown a significant contraction, making it difficult for the central bank to confirm that tightening has been achieved. Whether financial conditions remain as loose as the surveys suggest will largely determine the timing and pace of the next policy adjustment.

Conclusion

With businesses' willingness to borrow remaining strong, while policy interest rates have already reached high levels, the Bank of Japan's interest rate hike path has once again become the focus of market speculation. Survey data serves as a gauge of current financing conditions and may also foreshadow the next round of policy shifts; therefore, the Bank of Japan's every move in the coming months warrants close attention.