At the July meeting of the Bank of Japan, an additional interest rate hike to 0.25% was decided. Furthermore, the bank also determined the details of reducing its monthly purchases of government bonds, which currently amount to around 6 trillion yen. What will be the impact of this decision on mortgage rates? We asked Takashi Shiozawa, COO of MFS, known as a housing loan analyst and operating the mortgage comparison site “Moge Check.” (Tomoki Ishikawa, Izumi Shirayama)
Takashi Shiozawa of Moge Check discussing the BofJ decision meeting and mortgage loans
◆Did the path for price increases become clearer?
—The Bank of Japan has decided on an additional interest rate hike. How do you interpret the results of this July meeting?
I think they judged that the path towards the price increases targeted by the Bank of Japan has become clearer, thanks to the trend of rising wages. If the current wage increase becomes established, it should turn into positive real wages around autumn. Based on this scenario, the Japanese economy is expected to strengthen compared to before, so the need to keep interest rates between 0 and 0.1% is no longer necessary. However, since the economy is not as strong as that of the United States, it seems that the decision was made for a small incremental hike to 0.25%.
◆Political Pressure?
Also, I think there is political pressure involved in this interest rate hike. There has been considerable pressure from the political side to “do something about the weak yen.” The yen-dollar exchange rate can easily become a political issue and the media can easily highlight it. For example, when someone goes to Hawaii and finds the hamburgers are too expensive to buy. Thus, when the rate is around 160 yen to the dollar, people might say, “Hey, Bank of Japan, do something about this.” If the interest rate differential with the United States, where rates are high, continues to widen, it will lead to a greater tendency to sell yen and buy dollars. Part of the recent trend of yen depreciation was due to the interest rate differential between Japan and the US.
◆Is exchange rate control the responsibility of the Bank of Japan?
—However, the Bank of Japan’s monetary policy is not aimed at targeting exchange rates, is it?
That’s correct. As a fundamental principle, exchange rates are outside the purview of the Bank of Japan, and the actions should be taken by the government and the Ministry of Finance. It is primarily the Ministry of Finance that decides whether or not to intervene in the exchange rate. However, I doubt that Governor Ueda would mention political pressure as a reason for the interest rate hike. So, this remains speculation.
◆What will happen to mortgage rates?
—Could you tell us your outlook on variable mortgage rates?
I believe that due to this interest rate hike, variable rates will likely increase by about 0.15%. When the Bank of Japan raises rates, the “short-term prime rate,” which is a benchmark for variable rates, will increase by 0.15% around the end of August to September. The benchmark rate for variable rates will also increase by 0.15% at the same time as the rise in the short-term prime rate.
However, it is unlikely that variable rates will immediately rise starting next month. For those who are planning to take out a new variable rate mortgage, there will probably be almost no effect in August. After September, some banks may start to raise their rates. However, banks, especially online banks, that are looking for new customers may strategically choose not to raise their rates. Given the competition among similar companies, there will be banks that raise their rates and others that do not, leading to varying judgments.
◆A time lag in the rise of variable rates
For those who have already borrowed at a variable rate, there will also be a time lag in the rise of the borrowing rate. Each bank makes its decision on whether to raise variable rates in October and April each year. After this decision, the actual interest rates will rise three months later. Therefore, if rates do increase, it will likely be after January 2025. Conversely, this means that just because the Bank of Japan has raised rates doesn’t mean that variable rates will rise immediately.
—This time, they also decided to reduce the amount of government bond purchases. It is expected that long-term interest rates will rise, affecting fixed mortgage rates. Could you clarify this mechanism again?
To put it simply, first, government bonds have a price. Just like ordinary goods, if they become popular and the number of buyers increases, the price rises. On the other hand, if there are fewer buyers, the price falls. This is a basic economic principle. Until now, the Bank of Japan has been buying a significant amount of government bonds, which has driven the prices up. The interest rates that are often discussed should be viewed as the reciprocal of that. If the price increases, the interest rate decreases.
This time, since they have decided to reduce government bond purchases, the price of the bonds will fall and interest rates will rise.
Takashi Shiozawa of Moge Check discussing the BofJ decision meeting and mortgage loans
Why reduce the amount? Until now, the goal was to intentionally keep interest rates low to make borrowing easier for everyone and to encourage economic activity; this was like administering a large dose of medicine in an intensive care unit.
Now that there has been considerable recovery, we aim to normalize by transferring to a general ward. This is what the recent reduction in government bond purchases means. The interest rates that have been suppressed until now may gradually rise in the future.
◆Will fixed rates eventually exceed 2%?
What does this mean from the perspective of mortgage loans? The long-term interest rate, which is the interest rate on government bonds, is linked to the fixed mortgage rates. If long-term interest rates rise, the banks that lend loans will also seek to raise fixed rates. The representative fixed-rate product “Flat 35” currently has an interest rate of about 1.8%, but I think it is not surprising if it eventually exceeds 2%.
◆Will there be consistent increases?
—I’m curious whether fixed rates will continue to rise or not.
I don’t think there will be a steady increase. The only long-term interest rate that affects fixed rates is not just Japan’s. US interest rates also influence Japan and the world. It is expected that the Federal Reserve (the central bank of the US) will lower rates after September. If that happens, the overall pressure for rising interest rates globally will weaken, which could lead to a weakening, or even a decrease, in Japan’s long-term interest rates.
◆Interest rate hikes linked to future anxieties
—Please outline the key points when the BofJ judges to raise rates.
To normalize interest rates, the economy must be solid. Wages must rise, consumption must be active, and as a result, prices must rise. It is crucial to consider whether such economic conditions exist.
Additionally, personally, I consider it important how much anxiety young people have about their old age. Many young people today do not believe they will receive pensions, leading them to save and invest for the future instead of spending. Thus, they may not have money to spend on consumption.
Is it possible to loosen the money belt without worry? Unless various constraints are removed, I don’t think we will reach a point where interest rates rise steadily like in the US.
Takashi Shiozawa serves as COO of Japan’s largest mortgage comparison site “Moge Check.” On social media platform X, he offers advice on selecting mortgage loans under the name “Moge Zawa.” After graduating from the University of Tokyo’s Graduate School of Information Science and Technology in 2006, he worked at Morgan Stanley Securities. He has been COO of MFS since September 2015.