On the other hand, if interest rates rise due to heightened concerns over fiscal conditions in the absence of improvement in economic conditions, positive effects such as an increase in lending or improvement in interest rate margins on loans are unlikely to occur, thereby inducing strong adverse effects on financial institutions, namely, the occurrence of unrealized capital losses on bondholdings.
Although financial institutions have the capacity to absorb such adverse effects, this depends on the degree and pace at which the interest rates rise. To prevent concerns over fiscal sustainability from emerging, it is important for the government to steadily proceed with its initiatives on fiscal structural reforms. III.