With yen bond yields nearing five-year highs and the Bank of Japan tightening monetary policy, Japanese banks face new questions about the impact of higher interest rates on earnings and balance sheets. Japanese banks are the top holders of government bonds (JGBs), and as a proportion of bank assets bond investments are sizeable. The fallout from rising bond yields, however, will likely prove to be minimal. Banks have stopped adding to their bond exposure, and the accounting treatment of unrealized bond losses should protect bank income statements. If the economy continues to grow, gains on equity holdings and lending margins could more than offset losses on bond investments. On the whole, Japanese banks look well-prepared to weather falling JGB prices. This Asia Focus report discusses the risks and rewards of rising interest rates on Japanese banks.