Japan’s financial regulator will examine banks’ vulnerability to potential risks stemming from rising interest rates, including exposure to highly leveraged borrowers and real estate as the country’s central bank looks set to switch course.

The Bank of Japan is widely expected to make its first rate hike since 2007 within a few months. This raises the possibility that some borrowers will struggle to make higher interest payments.

"Banks need to be able to respond to interest rate moves and other changes in a timely manner,” said Toshinori Yashiki, deputy director-general at the nation’s Financial Services Agency (FSA), in an interview. "Banks might have loosened their loan discipline in a rush to secure short-term profits under years of low interest rates.”