With the Bank of Japan lifting its nearly six-year-old “zero-interest-rate policy,” the days of rock-bottom interest rates are finally over.
But ordinary savers should stick to cash rather than chasing after high-risk investments, says popular economic journalist Hiroko Ogiwara.
Ogiwara advises people to avoid taking on new debt and to speed up repayment of loans they already hold.
In an interview with The Japan Times, Ogiwara said: “The end of zero interest rates doesn’t mean the end of deflation. In fact, the government has not yet declared the nation to be out of deflation,” cautioning savers to hold onto their cash until inflation takes hold.
Nevertheless, Ogiwara hailed the BOJ’s move to lift the overnight call rate to 0.25 percent, comparing the ultralow interest rate policy with life support for a critically ill patient.
“You cannot live on artificial respiration in an intensive care unit forever. It would wear you out.” Ogiwara said.
Calling the interest rate rise “inevitable,” she said it was a necessary step in the normalization of monetary policy.
But the typical depositor may see little if any benefit from higher rates, having already gained nil on trillions of yen in deposits during the long years of near-zero rates.
“Banks are boasting of raising interest on deposits by 100 times . . . but that’s only raising rates from 0.001 percent to 0.1 percent,” Ogiwara said. “If you deposit 1 million yen, it will only pay 1,000 yen a year in interest.”
There are some time-deposit accounts promising annual interest rates of 3 percent to 5 percent, but there is often a catch, Ogiwara said.
In many cases, the higher rates apply only for the first few months. Depositors are meanwhile required to keep their money in the account for an extended period, or have to purchase financial products from the bank — on which they earn fees.
While interest rates are still low and banks look to boost revenue from ATM fees and commissions on investment trusts and other products, Ogiwara said there are few attractive, low-risk investment options for the average saver other than government bonds.
Gambling hard-earned money on stocks is a no-no, especially at a time of global uncertainty amid rising oil prices and political crises in the Middle East, Ogiwara said.
She advises people instead to avoid borrowing and to speed up payment of their mortgages and other loans because banks are raising the cost of debt for consumers.
With a 35-year, 30 million yen mortgage, for example, an increase in interest rates from 2.5 percent to 3 percent translates to 3.5 million yen in additional interest charges, Ogiwara said.
“On the other hand, if you pay off 1 million yen (of your mortgage) right away, for example, you can cut your long-term interest charges by 2 million yen (over the period of the loan). There’s no other investment that is so attractive,” Ogiwara said.
“The same goes for purchasing goods. Don’t borrow money, and buy things with cash,” she said, pointing out that borrowing costs are still far higher than most people can earn from investment.