October 28, 2026

Can Japanese Stocks Withstand Long-Term Interest Rates of 4-5%? — An Analysis Using Regional Banks, Earnings Yields, and Japan-US Yield Spreads

This article is an analysis based on publicly available information as of October 26, 2026, and does not recommend the buying or selling of any specific stocks or products. Figures are as of the time of the cited sources.

When long-term interest rates rise, stock prices fall. This is common knowledge, but few articles provide specific numbers on “how much” or “to what extent.”

The yield on Japan’s 10-year government bond rose to 3.105% on October 7 and returned to 2.80% on October 23. The US 10-year Treasury yield is stuck at around 5.0%, a level not seen since 2007. The Bank of Japan raised its policy interest rate to 1.25% in September.

In this article, we will examine the following three points:

Can regional banks withstand rising interest rates?
When long-term interest rates reach 4-5%, how far will the PER (Price-to-Earnings Ratio) of Japanese and US stocks fall?
Should Japanese stocks be sold off, and if not, what should be done?

Conclusion (Key Points First)

Japanese stocks have much higher interest rate resilience than US stocks. The difference between earnings yield and long-term interest rates (yield spread) is about 3.2pt in Japan, while it is only about 0.3pt in the US.
Even if Japan’s long-term interest rate reaches 4%, the standard case for stock price decline is about 9%, and about 17% in the worst-case scenario. At 5%, it is about 15% in the standard case and about 27% in the worst case. However, this assumes EPS (Earnings Per Share) remains flat.
For regional banks, the issue is the “burden of unrealized losses” rather than “bankruptcy.” Unrealized losses on yen bonds are 3.95 trillion yen, about 2.3 times the net profit (1.71 trillion yen), but profits are also growing due to interest rate hikes. However, there is a large disparity between individual banks.
US stocks have a spread of almost zero, leaving little room for interest rate hikes. EPS growth is what they rely on.
A total sell-off of Japanese stocks is not necessary. However, it is realistic to decide on actions based on interest rate levels and reduce exposure starting from areas vulnerable to interest rates.

1. Current Status: Comparing the “Stock Cheapness” of Japan and the US

First, let’s compare the figures for Japan and the US as of October 23, 2026.

Figure 1: Comparison of Stock Earnings Yield and Long-Term Interest Rates

$Item Expected PER Stock Earnings Yield 10-Year JGB Yield Spread Tolerance for Rate Hikes (Stock Price/EPS Unchanged) Japan (Nikkei 225) 16.65 x 6.0% 2.80% + 3.2 pt 3.2 pt US Stocks 19.0 x 5.3% 5.0% + 0.3 pt 0.3 pt$

Earnings yield is the reciprocal of the expected PER and represents the percentage of profit a company earns when you buy the stock. The higher the earnings yield compared to the government bond yield, the more “room for interest rate hikes” a stock has.

Japan: The weighted average expected PER of the Nikkei 225 is 16.65x. The earnings yield is about 6.0%, which is 3.2pt higher than the 10-year JGB yield of 2.80%.
US: The FactSet expected PER is 19.0x. The earnings yield is about 5.3%, and the difference from the US 10-year Treasury yield of about 5.0% is only 0.3pt.

The Nikkei 225 P/E ratio changes depending on the perspective

Even for the same Nikkei 225, the results change depending on the P/E ratio calculation method.

$Perspective on Nikkei 225 Weighted average base Index base Expected P/E 16.65 x 20.76 x Earnings Yield 6.0% 4.8% vs JGB 10Y (2.80%) + 3.2 pt + 2.0 pt$

Looking at the index-based P/E ratio (20.76x), the earnings yield is 4.8%, and the spread narrows to 2.0pt. This is still a higher level than the 0.3pt in the US. In this article, while we use the weighted average base as the standard, please note that the margin would be about 40% smaller if using the index base.

A sharp increase in EPS supports the low valuation

The expected EPS of the Nikkei 225 increased by approximately 43%, from 2,650 yen at the end of 2025 to 3,788 yen as of August 7. The P/E ratio appears low because earnings forecasts have increased more than stock prices.

On the other hand, EPS peaked at 3,982 yen on October 6 and has fallen to 3,765 yen as of October 23 (data site aggregation). If not only interest rates but also “E (earnings)” collapse, the premise of undervaluation will be shaken.

2. Can regional banks withstand rising interest rates?

Unrealized losses increased by approximately 1 trillion yen in one year

When interest rates rise, the price of government bonds held falls, and valuation losses (unrealized losses) expand. Regional banks have a high ratio of yen bond holdings, and the Bank of Japan’s Financial System Report (October 2026) also points out that “valuation losses on yen bonds are expanding, mainly among regional financial institutions with high ratios of yen bond holdings.”

Figure 2: Unrealized losses and net income of regional banks

$Item Regional bank yen bond unrealized losses Net income of 73 listed regional banks End of FY2025 2.90 trillion yen 1.25 trillion yen End of FY2026 3.95 trillion yen 1.71 trillion yen Change + 1.05 trillion yen + 0.46 trillion yen$

Unrealized losses on yen bonds at the end of the fiscal year ending March 2026 were 3.95 trillion yen, an increase of about 1 trillion yen from 2.90 trillion yen the previous year. The net income of the 73 listed regional banks was 1.71 trillion yen (a 36.7% increase from the previous term), and the unrealized losses are about 2.3 times the net income.

Banks with large unrealized losses

Figure 3: Top 10 financial institutions with large unrealized losses

Unrealized losses are concentrated in major regional banks such as Mebuki FG (approx. 232.5 billion yen), Fukuoka FG (approx. 217.2 billion yen), and Hachijuni Nagano Bank (approx. 213.7 billion yen). Since disclosure standards and timing differ for each bank, caution is required when making simple ranking comparisons.

What happens when interest rates reach 4-5%?

Additional valuation losses can be roughly estimated by “bond balance x duration x interest rate increase width.” Assuming a bond balance of 60 trillion yen (a premise from another analysis article) and a duration of 3-5 years, we calculated the impact of a rise from the current 2.80%.

Figure 4: Estimation of additional valuation losses for regional banks

$Average duration 3 years 4 years 5 years Interest rate 3.5% + 1.3 trillion yen + 1.7 trillion yen + 2.1 trillion yen Interest rate 4.0% + 2.2 trillion yen + 2.9 trillion yen + 3.6 trillion yen Interest rate 5.0% + 4.0 trillion yen + 5.3 trillion yen + 6.6 trillion yen$

If interest rates are 4%, the impact is 2.2 to 3.6 trillion yen; if 5%, it is 4.0 to 6.6 trillion yen. This is equivalent to 1.3 to 3.9 times the annual net profit of 1.71 trillion yen. Note that the premises of this estimate are the author’s assumptions, and actual balances and durations vary significantly by bank.

Reasons why it is still not a ‘crisis yet’

The Bank of Japan assesses that regional financial institutions are reducing interest rate risk by compressing yen bond balances and shortening durations.
Unrealized losses do not become realized losses if held until maturity. The problem arises when they must be sold to secure liquidity, thereby realizing the losses.
Loan interest rates are rising due to rate hikes, and core business profits are also increasing (net profit for 73 listed regional banks is up 36.7% from the previous period).

However, it is reported that the Financial Services Agency plans to complete inspections of unrealized losses on government bonds for approximately 400 regional financial institutions, including credit unions and credit cooperatives, by March 2027. There is significant variation among banks, and banks that were ‘late to cut losses’ will retain more risk.

Impact on Japanese stocks as a whole

In the author’s view, rather than regional bank unrealized losses directly pushing down the Nikkei 225, the risk to be wary of is the path through which bank loss realization and financial instability spread to market sentiment.

3. How much will the PER fall at long-term interest rates of 4-5%?

Concept: Whether the spread will narrow

The PER can be considered as follows.

適正PER = 1 ÷ (長期金利 + 必要スプレッド)

The current Japanese spread is 3.2pt. When interest rates rise, we divide it into three cases based on how much the spread narrows.

Worst case: The spread remains at the current 3.2pt (interest rate hikes directly push down the PER).
Standard case: The spread narrows by 0.5pt for every 1pt rise in interest rates.
Optimistic case: The spread narrows by the amount of the interest rate rise, and the PER remains unchanged.

Figure 5: Sensitivity of Japanese stock PER and stock prices

$10-year JGB Yield PER (Worst Case) Stock Price (Worst Case) PER (Standard Case) Stock Price (Standard Case) EPS Growth Needed to Offset (Worst) 3.0% 16.1 x - 3.2% 16.4 x - 1.6% + 3.3% 3.5% 14.9 x - 10.4% 15.7 x - 5.5% + 11.6% 4.0% 13.9 x - 16.7% 15.1 x - 9.1% + 20.0% 4.5% 13.0 x - 22.1% 14.6 x - 12.4% + 28.4% 5.0% 12.2 x - 26.8% 14.1 x - 15.5% + 36.6%$

In the worst case, there is a 16.7% decline at 4% and a 26.8% decline at 5%. In the standard case, there is a decline of about 9% at 4% and about 15% at 5%. If EPS increases by 20%, the decline in the 4% worst-case scenario can be offset.

How much will the Japan-US yield spread narrow?

If stock prices do not move, the spread will narrow as follows due to rising interest rates.

Figure 6: Yield Spread Contraction Path

Japan: +2.0pt at 4% 10-year bond yield, +1.0pt at 5%. Even at 5%, the earnings yield exceeds the government bond yield.
US: -0.2pt at 5.5%, -0.7pt at 6%. The earnings yield falls below the government bond yield.

In Japan, the spread remains positive upon reaching 5%, but in the US, it drops below zero with just a 0.25pt increase.

4. How much can US stocks withstand?

The situation in the US is in contrast to Japan. According to SSGA data, the forward P/E ratio of the S&P 500 has fallen from approximately 23x to about 19x over the past year, and the US 10-year bond yield is approaching 5% (a level not seen since 2007). The real interest rate (10-year) was 2.6% as of September 11.

According to FactSet, the forward P/E ratio is 19.0x, which is on par with the 5-year average of 19.8x and the 10-year average of 19.1x. In other words, the P/E ratio is average, but interest rates are at 2007 levels. This is the current state.

Figure 7: US Stock P/E Ratio and Price Sensitivity

$US 10-Year Bond Yield P/E (Worst Case) Stock Price (Worst Case) P/E (Standard Case) Stock Price (Standard Case) EPS Growth Needed to Offset (Worst) 5.0% 19.0 x 0.0% 19.0 x 0.0% 0.0% 5.5% 17.4 x - 8.7% 18.1 x - 4.5% + 9.5% 6.0% 16.0 x - 16.0% 17.4 x - 8.7% + 19.0% 6.5% 14.8 x - 22.2% 16.6 x - 12.5% + 28.5% 7.0% 13.8 x - 27.5% 16.0 x - 16.0% + 37.9%$

In the standard case, the US 10-year bond yield results in approximately -4.5% at 5.5%, -8.7% at 6%, and -16% at 7%. In the worst case, it is -16% at 6% and -27.5% at 7%.

The support for US stocks is the high EPS growth forecast. FactSet expects earnings growth of 32.8% in 2026 and 16.0% in 2027. If these forecasts are achieved, the decline in P/E due to rising interest rates can be absorbed. Conversely, if EPS forecasts fall, the market will be hit from both interest rates and EPS.

Recently, the US 10-year bond yield has been hovering around 5%, and a hold is widely expected at the FOMC (October 28). Meanwhile, the CME FedWatch reports a roughly 70% probability of a rate hike in December, making the chain reaction of “rate hike -> long-term interest rate rise -> P/E decline” a realistic risk.

Which is more resistant to interest rates: Japanese stocks or US stocks?

Difference from earnings yield: Japan 3.2pt vs US 0.3pt. Japan has the advantage.
EPS growth forecast: Both are surging, so they are evenly matched.
Exchange rate: Rising interest rates in Japan tend to be a factor for a stronger yen, which could be a headwind for the EPS of export companies (the author’s view).

Looking solely at interest rate resistance, it is not rational to “sell Japanese stocks and switch to US stocks.”

5. Should you let go of Japanese stocks?

The conclusion is “a total sell-off is unnecessary. However, decide on action rules for each interest rate level.”

Reasons why you do not need to sell

Even at a 4% long-term interest rate, the decline in the standard case is limited to about 9%
Spreads are larger than in the US, leaving room for interest rate hikes
Selling in a taxable account incurs capital gains tax, and timing reinvestment is difficult

Points to remain cautious about nonetheless

EPS decline: If EPS drops by more than 10%, the room for interest rate hikes shrinks rapidly
Risk of a sudden spike: The impact varies significantly depending on whether rates rise slowly or suddenly
Yen appreciation: If the yen strengthens due to a narrowing interest rate gap, the profits of export companies will decrease
Individual risks of regional banks: Avoid banks with large unrealized losses that are slow to cut their losses

Guidelines for action at different interest rate levels

$Japan Long-term Rate Below 3% 3.0% to 3.5% 3.5% to 4.0% 4.0% to 5.0% Over 5% or spike Situation Current Caution Adjustment phase Defense Shock Action Guideline Continue holding; buy new positions in stages Check EPS revisions and regional bank earnings Reduce ratio of high-PER stocks Lower the cap on equity allocation Convert a portion of risk assets to cash$

This is merely a framework for judgment; the optimal solution varies depending on an individual’s asset situation and investment horizon.

Organizing resilience to interest rate hikes by instrument

$Asset/Instrument Japanese Stocks (Value/Dividend Growth) Japanese Stocks (High-PER Growth) US Stocks Short-term Bonds/Deposits/MMF Gold Resilience to Rate Hikes Medium Weak Weak Strong Medium Summary Large buffer, but depends on EPS Most vulnerable to rising discount rates Almost zero buffer; rely on EPS Receive interest rate hikes as income Headwind from rising real interest rates$

Concrete countermeasures

Set a cap on holding ratios. Decide on the overall percentage of stocks and mechanically rebalance any excess caused by price increases
Reduce holdings starting with stocks vulnerable to interest rates. High-PER, non-dividend-paying growth stocks are most vulnerable to rising discount rates. Prioritize keeping stocks with high earnings yields or dividend growth
Hold assets on the “receiving end” of interest rates. Maintain a certain percentage of assets like short-term bonds, deposits, or MMFs that can capture interest rate hikes as income
If selling, do it in stages. Instead of selling all at once, act in phases at interest rate milestones (3.5%, 4%, 5%)
Check EPS monthly. Sometimes downward revisions in EPS have a greater impact on stock prices than interest rates

Summary

$Issue Regional Banks Japanese Stocks US Stocks Response Conclusion Unrealized losses are approx. 2.3x profits. Profits are surging, with large disparities between banks At 4%, standard -9%, worst -17 ext %; at 5%, standard -15%, worst -27% (EPS constant) Spread is near zero. Earnings yield falls below government bond yield above 5.5% Rather than total liquidation, use rules based on interest rate levels and reduce exposure to interest-rate-sensitive areas$

The biggest turning point is not the interest rate itself, but whether EPS continues to grow. If profits grow even as interest rates rise, stocks can withstand it. Conversely, the most dangerous scenario is when rising interest rates and declining profits occur simultaneously.

Fact Check

$Item Japan 10Y Bond Nikkei 225 Close Nikkei PER/EPS US 10Y Bond S&P 500 Forward PER Regional Bank Bond Losses Regional Bank Net Profit BOJ Policy Rate Additional Valuation Loss Article Value 2.80%(10/23), High 3.105%(10/7) 62,693.16 JPY(10/23) 16.65x / 3,765 JPY Approx. 5.0%(10/23) 19.0x(10/16) 3.95 trillion JPY(FY26/3) 1.71 trillion JPY, +36.7% 1.25%(Hiked 9/18) 3.6 trillion JPY, etc. Source 14 2,3 7,8 5,6 9 10,13 15,16 13 Verification Result Single site Consistent across 2 reports Difference in PER calculation Consistent across 2 reports Mostly consistent across 2 reports Single source, partially paid Consistent across 2 reports Consistent across 2 reports Author’s estimate (hypothetical)$

References

Long-term interest rate trends (stock-marketdata):https://stock-marketdata.com/japan-long-term-interest-rate
Nikkei 225 PER, EPS, PBR, Dividend Yield (stock-marketdata):https://stock-marketdata.com/kabukashihyo.html
Radio NIKKEI Market Review Materials (2026/8/12):https://www.radionikkei.jp/marketreview/docs/guest_260812.pdf
Nikkei 225 Summary (23rd) OANDA:https://www.oanda.jp/lab-education/market_news/mn_1040395_202610231757/
FactSet Earnings Insight (2026/10/16):https://advantage.factset.com/hubfs/Website/Resources Section/Research Desk/Earnings Insight/EarningsInsight_101626.pdf
SSGA Market Outlook (2026/9/21):https://www.ssga.com/library-content/assets/pdf/global/wmu/2026/mom-20260921.pdf
Yahoo Finance Stock market today (2026/10/23):https://finance.yahoo.com/markets/live/stock-market-today-friday-october-23-dow-sp-500-nasdaq-tesla-meta-093000521.html
Closing Look Friday, October 23, 2026 (CappNotes):https://cappnotes.substack.com/p/closing-look-friday-october-23-2026
Toyo Keizai Online: Regional Banks Face Trials with Surging Long-Term Interest Rates and Unrealized Bond Losses:https://toyokeizai.net/articles/-/947167
73 Listed Regional Banks See 90% Profit Growth, Surpassing 1 Trillion Yen in Profits for 2 Consecutive Years (Akita Sakigake Shimpo):https://www.sakigake.jp/news/article/20260515CO0185/
Top 10 Financial Institutions with Large Unrealized Bond Losses (money-pro):https://money-pro.net/news/202610-bond-loss-ranking/
Bank of Japan Financial System Report (October 2026 Issue):https://www.boj.or.jp/research/brp/fsr/fsr261023.htm
The Blind Spot of Regional Banks’ “90% Profit Increase” (note: Cat Who Speaks with Data):https://note.com/dataneko/n/na61708efea5d
Financial Services Agency to Inspect Unrealized Losses on Government Bonds at Shinkin Banks (Kumamoto Nichinichi Shimbun):https://kumanichi.com/articles/2032166
Bank of Japan Rate Hike to 1.25%, Pace Accelerates to Every 3 Months (Kumamoto Nichinichi Shimbun):https://kumanichi.com/articles/2037289
Accelerating Rate Hikes Bring Cruel Selection for Regional and Shinkin Banks… (FinTech Journal):https://www.sbbit.jp/article/fj/187522
Institute for International Monetary Affairs Economic Outlook (Notes on the June 2026 Rate Hike):https://www.iima.or.jp/docs/column/2026/ei2026.21.pdf

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