Rate hikes to help depositors little, borrowers less

by Yasushi Azuma

Kyodo News

Now the Bank of Japan put an end to its five-year-old ultraloose policy, the biggest concern for most people is how the change will affect them.

Analysts are anticipating the BOJ will raise the overnight call rate — a benchmark for short-term interest rates — by the end of the year. They have admitted that their own speculation might spur the financial market and cause medium- and long-term interest rates to rise slowly.

A positive aspect of a rise in rates will be an increase in interest on deposits. This will be welcome news for bank-account holders who have been getting scant interest income on their money.

According to the BOJ, 304 trillion yen in interest income on savings held by the public was lost under the monetary-easing measure implemented after the bubble collapsed in the early 1990s.

The current interest rate for ordinary bank deposits is at an astonishingly low 0.001 percent. This means a person with 1 million yen in the bank receives only 10 yen in interest a year — with 25 percent in taxes then levied on it.

Time deposits have slightly higher interest rates than ordinary deposits, but that interest is still next to nothing.

All this is in contrast to the costly transaction fees the banks charge for withdrawals and transfers, starting at 105 yen each.

While interest rates will rise, many economists have said it is naive to think there will be a dramatic increase in income from bank interest.

“Learning from when the BOJ lifted the so-called zero interest-rate policy in August 2000, we should expect that banks will raise deposit rates at a slower pace than rates for mortgage loans and other lending,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

When the BOJ dropped the zero interest-rate policy, the BOJ raised the overnight call rate to 0.25 percent. Reacting to the move, banks raised the ordinary deposit rate by 0.05 percentage point to 0.1 percent while pulling up loan rates by 0.125 point, according to Kumano.

“So raising deposit rates will have a bit of positive impact on consumer sentiment, but it is not realistic to think disposable income will grow due to an increase in interest income from deposits and spur consumer spending,” he said.

In contrast, interest rate hikes are expected to deal a severe blow to people with loans, particularly those with mortgage loans, because banks are expected to increase housing loan rates first.

“Because of low rates for corporate lenders, banks make profits on mortgage loans for individual customers and they will raise mortgage loan rates first,” Kumano said.

He also said people aged 35 to 50 probably will be hit hardest by higher interest rates as they tend to have mortgages.

The major banks announced in late February they would raise interest rates on mortgage loans in March, in reaction to surges in bond market yields on mounting expectations the monetary policy would change.

Sumitomo Mitsui Banking Corp. said it will boost the rate by 0.10 percentage point to 2.20 percent on two-year loans, and by 0.15 point to 2.50 percent on three-year loans. Both rates will be the highest in seven years.

A government estimate recently presented by the Council on Economic and Fiscal Policy, a key policy-setting panel, projects that long-term interest rates will move up to 3.9 percent in fiscal 2011, compared with 1.4 percent in fiscal 2005.

If this happens, mortgage rates will rise and drive up the payments for people without fixed-rate loans, analysts said.