Hitting 1 Percent in Long-term Interest Rate

Long-term interest rate in Japan has been showing gradual hike, since the Bank of Japan reduced purchase of Japanese government bonds (JGB) earlier this month. The yield on Japan’s 10-year government bond hit 1 percent on May 22, for the first time in these eleven years, with speculation that BOJ would further revise its monetary policy. The trend may affect economic activities of households and companies. 

In the bond market in Tokyo, newly issued 10-year JGB, which is the benchmark of long-term interest rate, marked 1.000 percent, 0.020 percent higher than the closing price of the previous day. It was the first time to mark 1 percent, since May 2013 when BOJ started large scale monetary easing policy. BOJ announced that it would terminate its ultra-easy monetary policy in this March. The hiking of long-term bond’s interest symbolizes the resumption of the economy with interest rate.

 

BOJ ended its yield curb control, which was a pillar of ultra-easy monetary policy with controlling of short- and long-term interest rate. Although the bank announced that it would keep the amount of JGB purchase for the time being, it reduced the purchase of 5 to 10-year JGB by 50 billion yen on May 13. The yield of 10-year JGB immediately began to rise to 0.940 percent and kept on rising toward 1 percent.

 

There is a speculation in the market that BOJ will further revise its monetary policy in the next monetary policy meeting scheduled in July. In the last monetary policy meeting in April, there were some opinions that it would be possible that the pace of normalization could be accelerated. Concerning persistent depreciation of Japanese yen even after the bank ended its negative interest rate policy, the market speculates further reduce of JGB purchase or further increase in the interest rate.

 

It would be a litmus test for Japanese economy to be durable in higher interest rate. Although companies in Japan have been supported by low interest rate and cheap yen, the long-term interest hike may affect the companies that has to pay for debt with interest. It may cause higher interest in the loans for companies and issuing corporate bonds, which is necessary for broaden their businesses.

 

The fixed rate for housing loans connects with long-term interest rate. If the rate rises, the payment will increase, causing less purchase of houses. While private banks had been setting the rate of housing loans less than 1 percent during the time of ultra-easy monetary policy, they already began to raise the rate of housing loans. Meanwhile, households may be benefitted by long-term interest rate hike with less payment for life insurance, because life insurance companies usually invest in long-term bonds.

 

The government of Japan needs to be careful. It has more than the balance of JGB more than 1 quadrillion yen. It has to replace old JGB issued in the time of low interest rate to new ones with higher interest. It increases the deficit of the government, making the balance of governmental finance worse.