TOKYO - At 74 years old, Mrs Tomiko Watanabe is coming round to a notion that has been inconceivable for most of her life: investing money.
This Mrs Watanabe, a name sometimes used to describe the archetypal Japanese retail investor, admits with a laugh that she does not understand interest rates. To her, Bank of Japan (BOJ) governor Kazuo Ueda – who on March 19 declared the end of the world’s last negative interest-rate policy – is just “the skinny man” on the news.
But recently, Mrs Watanabe has started to feel the sting of inflation for the first time in nearly four decades. A few expenses such as a car inspection and hearing aids for her husband mean there is nothing left of the couple’s 230,000 yen (S$2,040) monthly pension for a rainy day. So she has been speaking to a local bank about investing some of her savings for returns.
Across Japanese society, consumers are rethinking their finances as the country’s economy enters a new phase – one where borrowing costs can rise and prices can appreciate.
Moulded by decades of deflation, Japan’s residents have grown accustomed to a world of stagnant salaries, savings accounts that pay no interest and mortgages they trust will never become unaffordable. Cash and deposits accounted for more than 1 quadrillion yen, or 54.2 per cent, of Japanese household financial assets as of March 2023, compared with 12.6 per cent in the United States and 35.5 per cent in the euro zone.
That world is now disappearing. In February, the country’s stock market surpassed a 1989 record to hit a new historic high. Inflation has held at or above 2 per cent since April 2022 – the central bank’s key condition for shifting policy – and last week, the nation’s companies agreed to the biggest wage rises in 33 years. In response, the BOJ ended negative rates on March 19, setting a new range of between 0 per cent and 0.1 per cent with its first hike since 2007.
The changing outlook has made Japan exciting again for international investors, but domestically it has also set off a cascade of financial reflections among residents – from pensioners like Mrs Watanabe to middle-aged company workers and recent graduates. It’s also slowly starting to impact individual investment: The value of stocks and debt securities held by households jumped 27 per cent in 2023, according to calculations based on BOJ data.
Still, while markets have become buoyant, things look distinctly less rosy for many Japanese. Pay rises are failing to keep up with inflation, hurting their pocketbooks and undermining support for struggling Prime Minister Fumio Kishida. A Cabinet Office poll published on March 8 found 50.7 per cent of respondents were dissatisfied with their lives, while a survey by the Mainichi newspaper the same month found 87 per cent of respondents did not feel the economy was improving.
Mr Takashi Shiozawa, an executive at MFS, which operates an online mortgage broker, said: “For the BOJ, it might seem like just a 0.1 percentage point move to remove negative interest rates, but in terms of the average consumer, there’s a possibility that the negative psychological impact will be many times greater than that.”
For households, rising rates will be a double-edged sword. Savers will experience higher deposit rates at banks but also higher interest on personal loans – about 75 per cent of home mortgages in Japan are on floating rates linked to the central bank’s short-term interest rate. Some of Japan’s largest banks have already said the deposit rate on savings will go up, while mortgage rates remain unchanged for now.
While the yen weakened immediately after the BOJ’s move, higher rates may eventually strengthen the currency, easing the prices of imports like petrol and food but dampening the foreign tourism boom and weighing on exporters. If rising living costs continue to outpace wage hikes and interest on savings, that may cut into already weak domestic demand and render Mr Kishida’s government even more unpopular.
The BOJ’s exit from negative rates brings to a close an era of unconventional policymaking that was also adopted by the European Central Bank and others in the years after the global financial crisis of 2008, as they battled falling prices.
But Japan’s campaign against deflation has been the most radical, and the longest-lived. While interest rates only turned negative in 2016, the bank’s bid to spark demand by buying bonds and equities began after the economic bubble of the late 1980s burst. In its later years, the scale of that operation became truly staggering: The bank bought more than 1 quadrillion yen of Japanese government bonds in the decade to 2023, and at one point became the largest owner of the country’s stocks with holdings of well over US$400 billion (SS$538 billion).
During those decades, Japanese savers slowly built up a giant cash hoard bigger than the economy of any country in the European Union – and earned essentially no interest on it. A US$10,000 deposit made to a Japanese savings account in 1994 would have earned about US$150 by now, according to Bloomberg calculations based on BOJ data. The same sum in a similar US account would have accrued US$2,381, according to BankRate.com.
Still, for most Japanese people, keeping money in the bank – even at deposit rates as low as 0.001 per cent – was a stable, risk-free proposition made more attractive by the fact that costs didn’t go up. That has started to change over the past two years. When Kikkoman raised the price of its famous soya sauce for the first time in 14 years, it was big news. So was an announcement that the price of postage stamps will rise in 2024, for the first time in three decades.
Higher interest rates usually cool the property market as mortgages become more expensive, although in Japan’s case the damage may be limited as rates are unlikely to rise steeply and there are stipulated limits on how much mortgage payments can increase. For Mr Yasufumi Ishii, a 50-year-old employee at a cosmetics company living in Funabashi, a commuter city 24km east of Tokyo, the prominence of inflation in the news – as well as its effect on items like the bread he buys for breakfast – has spurred him to consider buying a house, among other investments.
“I thought I would always rent,” Mr Ishii said. “I think the current economic situation and inflation being on the rise is probably a big factor in my decision.”
For 32-year-old Hu Shenqiang, keeping money in the bank is a losing proposition. He puts about half of his pay cheque into an investment account every month.
Mr Hu, who is from China, has spent more than a decade in Japan and works for a large company in Tokyo. Two years ago, he purchased a one-bedroom apartment in the city for 55 million yen with a 35-year mortgage at a 0.47 per cent floating interest rate. Payments for floating-rate mortgages in Japan typically cannot be adjusted within the first five years, so Mr Hu is not concerned about any immediate impact to his monthly bills.
For now, he thinks he can manage his mortgage rate going up as high as 2 per cent in the coming years, as he expects his salary to increase steadily.
“I’ve never seen a world in which interest rates can go up,” Mr Hu said. “But when I look at the US and other countries where interest rates are now like the level of developing countries, I realise it’s not something I can just take for granted. I think it’s important now to be more considerate of risks.” BLOOMBERG
