What are long-term and short-term interest rates? We have organized their impact on mortgages, savings, and stock prices

“The Bank of Japan raises interest rates,” “Long-term interest rates rise.”

Every time I hear this in the news, I naturally worry about my own life.

It has been four years since I bought my house. I am concerned about my mortgage, and since I am building assets, I am also concerned about the impact on stock prices.

But, to begin with, what is the difference between long-term and short-term interest rates?

Are rising interest rates only a bad thing? Will interest on savings increase? Will stocks fall?

This time, I have tried to break down the difficult terms as much as possible and organize them in relation to our daily lives.

1. Interest rates are the burden on the borrower and the reward for the lender

Interest rates are the percentage of interest charged on borrowed or deposited money.

In the case of a mortgage, we are the borrowers. When interest rates rise, it works in a direction that increases the burden of interest payments.

In the case of bank deposits, we are the ones depositing money into the bank. If deposit interest rates rise, the interest we receive increases.

In other words, even with the same interest rate hike, the way we feel about it differs depending on whether we are borrowing or depositing.

First, if you separate “which money the interest rate applies to,” the outlook becomes a little clearer.

2. Short-term and long-term interest rates also move differently

Short-term interest rates are interest rates applied to the lending and borrowing of money for short periods.

What attracts attention in the news as the Bank of Japan’s policy interest rate is the “uncollateralized overnight call rate,” at which financial institutions lend and borrow money to each other until the next day. The Bank of Japan decides what level to guide this interest rate toward.

On the other hand, long-term interest rates are generally interest rates applied to lending and borrowing for periods exceeding one year. A representative indicator in Japan is the yield on 10-year government bonds.Explanation by MUFG Bank

Long-term interest rates are not determined solely by the Bank of Japan’s current policy.

“Will interest rates likely rise in the future?” “What will happen to prices and the economy?” They move in the market by reflecting such future expectations and the premium for lending money for a long time.Explanation by the Bank of Japan

The movements of people who want to buy and sell government bonds are also involved. Therefore, long-term interest rates may rise before the Bank of Japan actually raises interest rates.

It is not the case that “the interest rate decided by the Bank of Japan becomes all interest rates as they are.”

3. For mortgages, the “type of loan you have” is what matters

This is the first thing I want to check.

In general, variable-rate mortgages are considered more susceptible to short-term interest rates, while fixed-rate mortgages for new loans or refinancing are more susceptible to long-term interest rates.Explanation by MUFG Bank

However, the impact on those who have already taken out a loan depends on the contract.

• Full-term fixed-rate type: In principle, the contracted interest rate does not change until the loan is fully repaid.

• Fixed-rate period selection type: After the fixed period ends, the interest rate may change based on the conditions at that time.

• Variable-rate type: The interest rate is reviewed in accordance with the contract, and the repayment burden may increase.

This distinction can also be confirmed in the explanation by the Japanese Bankers Association.

Also, the timing of the review of the applied interest rate and the review of the monthly repayment amount are not necessarily the same. Even if the repayment amount remains fixed, the proportion of interest may increase, causing the principal to decrease more slowly.Supplementary explanation by the Japanese Bankers Association

Do not assume that “everything is fine because the monthly withdrawal amount has not changed”; it is best to check the interest rate, repayment amount, and balance together using the information provided by your bank.

4. A tailwind for deposits. However, be a little careful with bonds

If deposit interest rates rise, it is a welcome change that interest earnings will increase.

However, not all deposit interest rates will rise immediately by the same margin as the policy interest rate. It varies depending on the bank and the product, and for fixed-rate time deposits already deposited, the contracted interest rate usually continues.

And even if interest earnings increase, if prices rise by more than that, it does not necessarily mean you can buy more things.

Another thing that is easy to confuse is bonds.

When market interest rates rise, the market price of already issued fixed-rate bonds tends to fall. It is necessary to distinguish between the rise in yield for new buyers and the valuation of those already held.

Yield is related not only to interest but also to the purchase price and the period until redemption.Ministry of Finance: “How are government bond yields determined?”

Note that the mechanism for government bonds traded on the market is different from the mid-term redemption of government bonds for individuals. It is important not to assume that everything has the same price movement or redemption conditions just because they are called “government bonds”.Ministry of Finance: “Government Bonds for Individuals”

5. It also connects to prices, the economy, and the value of the yen

When the interest rates at which companies borrow money rise, they may become cautious about investing in new stores or equipment. Households also find it harder to commit to large purchases.

Suppressing consumption and investment in this way works to curb price increases. On the other hand, it can also be a burden on the economy and corporate performance. Bank of Japan: “How does monetary policy affect the economy and prices?”

What we should be careful about here is that “the momentum of price increases weakening” and “returning to previous prices” are two different things.

It does not mean that products at the supermarket will become cheaper the day after news of an interest rate hike is released.

Also, all other conditions being equal, a narrowing of the interest rate gap with overseas markets due to rising interest rates in Japan becomes a factor for a stronger yen. However, exchange rates are also influenced by overseas policies, economic conditions, and market expectations.

If the yen strengthens, we can expect a reduction in import costs, but since the prices of raw materials themselves and corporate pricing strategies are also involved, it does not necessarily mean that retail prices will fall.

The impact on household finances reaches us through various channels and with a time lag.

6. There are mainly three downward pressure factors on stock prices

Rising interest rates generally act as a factor that pushes down stock prices. It is easier to understand if we break down the reasons.

The first is that corporate borrowing costs increase.

Even with the same sales, if interest payments increase, it works to reduce profits. However, the impact varies depending on the amount of debt and the terms of the interest rate contracts.

The second is that the attractiveness of other investment targets increases.

When it becomes possible to earn higher yields than before from bonds and the like, some of the money that was invested in stocks may shift.

The third is that the criteria for evaluating future profits change.

When considering stock prices, the money a company will generate in the future is converted into its “present value.” If the discount rate used in this calculation rises, all other conditions being equal, the valuation will be lower. Companies that rely on expectations of profits in the distant future tend to be more susceptible to this impact. Explanation by MUFG Bank

Short-term interest rates are involved in stock prices through corporate financing and the like, while long-term interest rates are involved through long-term financing and investment evaluations. They cannot be neatly separated.

7. Even so, “interest rate hike” does not necessarily mean “stock price decline”

This was the point I wanted you to remember most this time.

What happens if the economy improves and corporate profits grow while interest rates are rising?

Even if there is downward pressure from interest rates, expectations for business performance can support stock prices. Stock prices are related not only to interest rates but also to corporate performance and exchange rates. Japan Exchange Group: “How stock prices are determined”

And the market moves by anticipating events before they are announced. The reaction will also change depending on whether the interest rate hike is as expected or more sudden than anticipated.

Conversely, if the economy worsens significantly and interest rates are cut, stock prices may fall even if interest rates go down.

Therefore, when watching the news, in addition to whether things have “gone up or down,” you need to look at why they moved and how corporate profits are likely to be affected as well.

There are also differences by industry. For example, for banks, if the spread between lending rates and deposit rates widens, it is positive for earnings, but they are also affected by funding costs, loan defaults, and declines in the value of bonds they hold. You cannot simply assume that “if interest rates rise, you should buy bank stocks.” Bank of Japan “Comprehensive Review of Monetary Policy”

When investing in overseas stocks, you cannot judge based on Japanese interest rates alone. The interest rates and economic conditions of the country you are investing in, as well as changes in the yen-converted value due to a stronger or weaker yen (if there is no currency hedge), are also relevant.

8. I want to check “my own money” before the news

Learning how interest rates work makes it feel like there is more to worry about.

However, rather than trying to perfectly predict future interest rates or stock prices, it seems more useful to me to first check my own household finances.

• Check your mortgage interest rate type, current applicable interest rate, and the next review period.

• Think about how much your monthly household budget can absorb if repayments increase.

• Keep living expenses and money you will use in the near future separate from assets that fluctuate in value.

• Review whether your investment amounts are putting pressure on your current lifestyle or time with your family.

For refinancing or early repayment, I want to think about it including fees and the money remaining on hand, rather than jumping in based solely on interest rate differences.

Is it necessary to rush to sell the assets I am accumulating just because interest rates have risen? I want to go back to thinking about the purpose and timing of my own money there as well.

It has been four years since I bought my house. Future repayments and my family’s life are both important.

I want to be able to think, “When and how will this affect us?” instead of just being startled by the numbers in the news.

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This article summarizes general mechanisms and does not predict interest rates, exchange rates, or stock prices, nor does it recommend specific products. Please check the guidance from the financial institution you use for conditions such as mortgages.