Key Factors That Distinguish Wealth from Poverty Amid Rising Interest Rates

“Sumishin SBI Net Bank has announced that it will raise the short-term prime rate by an additional 0.15% starting in October.

 

Online banks have set their benchmark rates close to the breakeven point, so they are likely to increase rates in response to this hike. Considering the cost of funding from the short-term financial markets, online banks are more sensitive to the Bank of Japan’s rate changes than major banks and may have no choice but to raise their variable rates.

 

In the past two or three years, more people have been taking out mortgages with online banks. Therefore, those with variable-rate mortgages from online banks might be significantly affected by this rate hike.”

After a year and a half, the policy rate might reach 1%! The worst-case scenario is stagflation.

After the Bank of Japan’s monetary policy meeting on July 31, Governor Kazuo Ueda stated in a press conference that if inflation rates follow the projections, the policy interest rate would be raised accordingly, and the degree of monetary easing would be adjusted.

One week later, on August 7, Deputy Governor Shinichi Uchida spoke in Hakodate, Hokkaido, and indicated a cautious stance on additional rate hikes, saying, “We will not raise interest rates in the current unstable financial market.” However, he also mentioned that there are no differences in views between him and the Governor, and market participants believe that if the market stabilizes, the Bank of Japan may shift towards rate hikes.

“In the short-term financial market, there is a 20-30% chance of an additional rate hike within this year.

However, the main scenario is to raise the rate by 0.25% to 0.5% by March or, at the latest, April 2025. Another rate hike to 0.75% is expected by September or October 2025. Additionally, there is an increasing impression among financial market experts that the rate could rise to 1% by the end of March 2026.”

If the policy interest rate rises to 1%, households with existing low variable-rate loans will experience a significant increase in their repayment amounts. Matsuoka expresses concern about whether households can withstand the higher variable rates when the policy rate reaches 1%.

“Until now, the base rate for variable loans has been around 2.475%, with the applicable rate approximately 0.3-0.5%. The applicable rate is the actual burden rate after subtracting the preferential margin from the base rate. If the policy interest rate increases to 1%, the applicable rate will significantly exceed 1%.

With an applicable rate of 0.3-0.5%, the amount returned from the housing loan tax deduction exceeds the interest payments. However, if the policy rate reaches 1%, the interest payments on housing loans will exceed the tax deduction benefits.

Those who have taken loans up to their limits are unlikely to be able to switch to fixed-rate loans.” 

Given this situation, concerns about the scenario following a 1% policy interest rate arise.

“If the rate remains at 1%, there is a possibility that the Japanese economy could enter a recession. 

The worst-case scenario would be if inflation does not subside even with a 1% policy rate, leading to a deepening recession and stagflation. In such a state, where neither lowering nor raising interest rates is possible, the economy could worsen while prices continue to rise. In this case, it wouldn’t be surprising if many people are unable to manage their loan payments.”