The Bank of Japan has raised interest rates for the second time in nearly twenty years, which will affect millions of personal mortgage loans.
The Bank of Japan, Japan's largest bank,$Mitsubishi UFJ Financial Group (MUFG.US)$said it plans to raise short-term preferential interest rates in September, the first time in 17 years, following the Bank of Japan's interest rate hike on Wednesday. Other banks are expected to follow suit. About 75% of Japan's personal mortgage loans are floating rate loans linked to short-term preferential interest rates set by banks individually.
The prospect of rising mortgage costs in Japan may dampen already weak household confidence and the real estate market. On Thursday, real estate stocks had the largest decline among all industry sectors traded in Tokyo. For banks, raising interest rates will increase the profitability of loans.
Unlike other developed economies, mortgage rates in Japan have been declining for many years, as banks compete for loan business while the Bank of Japan maintains its negative interest rate policy. Some online banks still advertise rates as low as 0.27%.
The mortgage interest rates in Japan may have finally reached their bottom.$Mitsubishi UFJ Financial Group (8306.JP)$The Group said on Wednesday that its domestic loan department will raise short-term preferential interest rates by 0.15 percentage points to 1.625% from September 2, the first rate increase since 2007. The floating mortgage interest rate of Mitsubishi UFJ Financial Group is currently as low as 0.345%.
Higher mortgage rates may put pressure on the real estate market. Under factors such as the weakened yen, insufficient supply, and shortage of construction workers, the price of new apartments in Tokyo has steadily risen.
Major developers$Mitsui Fudosan (8801.JP)$And.$Mitsubishi Estate (8802.JP)$'s stock prices fell by as much as 9.4%, the biggest intraday drop since 2020.
However, the impact on existing homeowners may be delayed. Most$The Bank Of Japan (8301.JP)$have rules that the monthly mortgage repayment amount can only be adjusted once every five years. Therefore, although the total interest and repayment amount of mortgage loans will increase with the increase of interest rates, the monthly repayment amount may currently remain unchanged.
Analysts are concerned that this could have an impact on already weak consumer spending. Takashi Shiozawa, a senior executive at online mortgage brokerage MFS, said, "I don't think the rise in mortgage rates will have a major impact, but people are worried that it will have a negative impact on consumer confidence."
Bank of Japan Governor Haruhiko Kuroda said the decision to raise interest rates was based on expectations of sustained wage increases in Japan. He mentioned the five-year mortgage regulation, saying that during this time, many repayments may not change, while he expects wages to rise. He said, "The burden may be eased because wages will rise first and then mortgage rates will rise."
He said, "As wages rise, the burden may be eased before mortgage rates rise."
Editor/Emily