TOKYO – One year on from Japan’s historic rate hike, profits at its biggest banks are soaring to records, while price rises are forcing consumers to cut back and higher borrowing costs are fueling a political battle over how the government can rein in its outlays.
Bank of Japan (BOJ) governor Kazuo Ueda scrapped the world’s last negative interest rate and its massive stimulus programme a year ago, encouraged by record gains in annual wage deals. Those pay increases suggested consumers were in a position to help drive prices and growth, supporting the inflation trend.
The bank’s first rate hike in 17 years was followed by two more in the space of months, the swiftest pace since 1989, when it was at the peak of a “bubble economy” that burst shortly afterward. Economists expect the BOJ to hold its fire this week before raising rates again, most likely in July.
The BOJ has long argued that generating a lasting cycle of rising wages, consumption and growth is worth the pain of adjusting to life with higher prices. Economists and policymakers see increasing signs of that cycle taking hold, but consumers struggling with steeper food bills are less convinced.
“Prices are still rising much faster than my pay,” said 50-year-old office worker Masashi Fujii, who is married with two kids. “And the effect of higher interest rates on my savings is completely nonexistent.”
Persistent inflation is helping accelerate change in Japan. Companies are more willing to pass on rising costs to customers. Expectations of a more expensive future are encouraging a growing cohort of retail investors to look for new ways to fund their retirement rather than relying on increasingly meagre pensions.
For now, the biggest winners are the banks. Loan rates are set to help all three megabanks achieve record profits in the financial year to March, after they pared costs in leaner times.
Sumitomo Mitsui Financial Group estimated that the BOJ’s rate hikes will generate an extra 90 billion yen (S$807 million) in income in the year ending this month. Every quarter-percentage point increase will generate an additional 100 billion yen annually, it said. At the same time it still pays out just 0.2 per cent to depositors.
Banking stocks have gained about 29 per cent since the start of March last year, even as the overall Topix benchmark index stayed flat. For smaller banks with less diversified portfolios, the picture is less rosy in the short-term, as the falling value of their bond holdings is likely to outweigh the benefits of higher rates.
An ailing currency that might have expected a boost from the BOJ’s actions continued to weaken at first due to the chasm between US and Japanese rates, which are still just 0.5 per cent. Japan’s government wound up forking out US$100 billion (S$133 billion) to prop up the currency in 2024.
Now with more investors buying into the likelihood of further rate hikes in Japan and looking for safety in light of concerns over US President Donald Trump’s tariff tactics, the yen is back to where it was before the first hike, just below the 150 mark against the US dollar.
Still, the ongoing weakness of the currency, at around half its value 13 years ago, has opened the floodgates to foreign tourists, bolstering hotel, restaurant and retail businesses. At the same time it accelerates inflation, because Japan relies on imports for much of its food and fuel.
Households are being forced to scrimp and bargain hunt as their purchasing power drops. The BOJ focuses on core inflation as it mulls policy, but consumers feel the effects of 4 per cent overall inflation that includes fresh food prices. January wage data showed that for all the gains in pay, real wages still dropped 1.8 per cent from a year earlier. More food price hikes are forecast for April.
Economic growth figures for the last quarter of 2024 show consumption flatlining in real terms, an indication that the positive expansion cycle has yet to fully emerge.
“The BOJ’s rate hikes are rubbing salt into a wound,” said Kazuo Momma, former BOJ executive director, referring to relatively low-income earners with consumer loans and mortgages who are already struggling with inflation.
“Wealthy people aren’t bothered much by price increases and their assets are growing thanks to better returns due to higher interest rates,” he said. “A widening of this gap will lead to political instability.”
Support for Prime Minister Shigeru Ishiba’s cabinet slumped eight percentage points to 36 per cent in the latest poll by public broadcaster NHK, with surveys showing inflation among the top issues voters want him to tackle.
That’s not a great place for Mr Ishiba ahead of a summer election. He’ll need to demonstrate his minority government can do more for voters before then if he is to improve on the ruling party’s dismal performance in last October’s general election.
As the minority government wrangles with opposition groups over a proposal to cut spending on things like advanced cancer treatments, one of the most painful side-effects of the BOJ’s policy may be the limits it places on public outlays.
Benchmark 10-year government bond yields have surged to a 17-year high as the BOJ raised rates and pulled back from its massive bond purchases. That means the government will have to pay higher levels of interest on fresh debt and existing bonds that are rolled over.
Debt-servicing costs, which already account for almost a quarter of the annual budget, are forecast to rise by 25 per cent to almost US$230 billion over the next four years as interest rates rise.
“We need to remind ourselves how this can create a snowball effect, where debt keeps expanding from the rising interest payments alone,” said Mana Nakazora, chief credit strategist at BNP Paribas Securities, who also serves as an adviser to the government.
For now, homeowners have yet to feel the pain of higher mortgages as competition among lenders delays rises. About 75 per cent of home loans in Japan carry floating rates linked to the central bank’s short-term interest rate. But Japan’s largest banks are still advertising mortgage rates as low as 0.345 per cent, below the BOJ’s overnight rate.
Still, the average price of a new condo for sale in the Japanese capital and surrounding areas fell 3.5 per cent in 2024, according to the Real Estate Economic Institute, after rising nearly 40 per cent in the previous six years. That’s a sign the market is already cooling with the prospect of higher rates.
The majority of Japanese still see interest rates as too low, according to the central bank’s own survey. But the minority describing them as too high is growing and now comprises around a fifth of respondents. Consumer debt and corporate bankruptcies are also on the rise as rates creep up – with more than 5,000 companies going under between April and September, the highest in a decade. BLOOMBERG
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