Posts Tagged ‘Bank of Japan’

Anticipation: How high will mortgage interest go?

Tuesday, May 7th, 2013

Of course, you can always pay cash

Of course, you can always pay cash

Just as deposit interest rates have remained near zero for the past 20 years in Japan, housing mortgage interest rates have been lower here than almost anywhere else in the world. The effect of the latter has been almost counter-intuitive. Low interest usually spurs investment in real estate and home sales but Japan’s economic situation, not to mention its housing environment, is so odd to begin with that this hasn’t proved to be the case. Younger people thinking about buying homes have lived with low interest rates for so long that they think it’s the norm.

Last week interest rates for housing loans increased by 0.05 percent, the first rise in three months. Interest rates for loans are based on 10-year-bond interest rates. The Bank of Japan, on behalf of the prime minister, is gunning for a two percent inflation rate, and in order to achieve that goal it announced plans to buy government bonds from banks. Anticipating the BOJ’s move, investors have started to sell their bonds. When the price of bonds goes down the interest they pay goes up. More people sold bonds than the BOJ projected, which may not make the government happy since in the long run it will have to pay that interest to bondholders. If consumer prices and, in turn, salaries go up, that won’t be a problem since the government can collect more taxes as a result, but if inflation doesn’t kick in then it just means even more government debt.

Consumers are more concerned with how the change in interest rates will affect them directly. A recent article in Aera profiled a working couple in their 30s who have decided to buy a condominium in Tokyo right away in anticipation of the consumption tax rise next year. Because they both want to be near their workplaces, they settled on an area where the price of a condo that fits their lifestyle is about ¥50 million. They only have ¥3 million for a down payment, and they chose a variable interest rate because it’s lower than a fixed rate right now. Aera asked a financial planner about their situation and the planner seemed dubious.

Continue reading rising interest rate →

Yen surge not as strange as it sounds

Tuesday, March 22nd, 2011

Last week, when all those foreigners bolted the country they got a nice little windfall from the ongoing crisis if they traded in all their hard-earned yen for whatever currency they’d need to get by back home. When markets opened after that nerve-wracking weekend the U.S. dollar, for instance, had lost up to ¥5 since the week before, from 82 to 77. A lot of people were dumbfounded, since such a reaction flies in the face of so-called textbook economics. Why would Japan’s currency get stronger as a result of such a disaster? Wouldn’t people be trying to unload their yen?

Whoops!

The easiest explanation for the surge was the idea of “repatriation.” Japanese companies with investments overseas in other currencies quickly exchanged much of their holdings into yen in order to pay for reconstruction or, in the case of insurance companies, to pay benefits to people and businesses with damage policies. However, as most Japanese economists have pointed out since then, that alone wouldn’t have explained such a pronounced increase in such a short time.

According to the Mainichi Shimbun, the Great Hanshin Earthquake of 1995 created a precedent for the yen surge. Three months after that earthquake destroyed much of Kobe, the yen was the highest against the dollar that it had ever been in history up to that point. At the time, Japan’s GDP was still the envy of the world, and investors with extra cash decided to buy yen, believing that it was sounder than a lot of other investments, especially since Kobe would require lots of money to rebuild. They were basically chasing the repatriated yen. As always, Japan’s exporters panicked. The Bank of Japan intervened to bring the yen down, but they were unsuccessful. It wasn’t until the summer, when the United States and Europe joined in the intervention, that the yen started to drop.

Continue reading about the post-quake yen. →

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