The Shock of Long-Term Interest Rates Exceeding 3%—Is Your Household Budget Okay?
“I heard interest rates went up again, but I guess that doesn’t really concern me.”
Are you thinking that? Actually, you can’t say that for sure.
Recently, it was reported that the yield on newly issued 10-year Japanese government bonds, which serves as a benchmark for long-term interest rates, temporarily rose to 3.115%, marking its highest level since August 1996. “Since 1996” means about 30 years ago, which is a historical level that goes back almost entirely through the long era of low interest rates following the collapse of the bubble economy.
For households with mortgages, those saving for retirement, and those investing in savings or bonds—this rise in interest rates is actually not unrelated to your wallet. Today, as the “world with interest rates” is truly returning, I would like to talk as concretely as possible about what kind of changes are occurring in our lives.
What do you mean by “long-term interest rates”?
First, let me clarify the terminology just a little bit.
Long-term interest rates mainly refer to the yield on 10-year government bonds. Government bonds are like IOUs issued by the government saying, “Please lend us money.” This yield acts as a “thermometer” for the interest rate level of the entire economy and also influences the setting of fixed interest rates for mortgages and interest rates for bank time deposits.
After the bubble burst, Japan experienced an unusual state of “zero interest rates” and “negative interest rates” for a long time. I think many of you have experienced an era where “even if you deposit money, you get almost no interest.” Now, that is gradually, but surely, starting to change.
If you have a mortgage, now might be the time to review it
The question I am asked most often in consultations is, “Is it okay to stay with a variable interest rate?”
Mortgages are broadly divided into “variable interest rate types” and “fixed interest rate types.” Since variable interest rates are linked to the Bank of Japan’s policy interest rate, they have not moved as sharply as fixed rates so far. However, if policy rate hikes continue, there is a strong possibility that they will rise with a delay.
On the other hand, fixed interest rates (such as Flat 35) are directly linked to long-term interest rates, so they have already started to rise. If interest rates remain high in the future, the burden on those who borrow at fixed rates from now on could become even heavier.
If you currently have a mortgage with a variable interest rate, I recommend that you simulate “how your monthly repayment amount would change if interest rates were to rise by 1–2% by any chance.” The increase in repayments due to rising interest rates varies considerably depending on the loan balance and the remaining term. It is important to check with numbers rather than just thinking, “It will probably be fine.”
Even when considering refinancing to a fixed interest rate, you need to compare the total cost, including various expenses (fees, registration costs, etc.). Even if you feel that “it is safer to switch to a fixed rate,” whether you can recover the refinancing costs depends on individual circumstances, so I would like you to judge carefully without rushing.
Actually, there are people for whom this is a “tailwind”
Rising interest rates are not all bad.
For example, bank time deposit interest rates are gradually rising. For those who felt that “even if I deposit money, it won’t increase anyway,” the feeling that their savings are “working for them” might have returned for the first time in a while.
Also, individual government bonds (especially the 10-year variable type) are attracting attention. This is a mechanism where the interest rate is reviewed every six months, and if interest rates rise, the interest received also increases. It is also attractive because it is principal-guaranteed and easy to purchase from 10,000 yen.
However, it is also worth considering whether to switch all at once to long-term time deposits or fixed-interest bonds to “lock in the current high interest rates.” If interest rates rise further, you may suffer unexpected losses if you cancel or cash them out midway. It is wise to move while looking at the overall balance while allocating a portion of your assets to such products.
Impact on retirement fund planning—the importance of taking a long-term view
When it comes to building assets for retirement, rising interest rates cannot be ignored.
I believe many of you are accumulating equity investment trusts through iDeCo or NISA. Generally, it is said that rising interest rates tend to have a negative impact on the stock market. In fact, price movements can become volatile during periods of rising interest rates. However, there is no need to be swayed by short-term fluctuations when investing through long-term accumulation. Rather, we should patiently leverage the characteristic of accumulation, which allows us to purchase more units when prices fall.
On the other hand, for those who are concerned about the risks of being invested solely in stocks, it is also true that the appeal of bonds and deposits has relatively increased due to rising interest rates. I think it is also valid to view this as an opportunity to reconsider adding highly stable assets to your portfolio.
Summary: A phase where ‘knowing or not knowing’ makes a big difference
An interest rate level not seen in about 30 years is an almost entirely new experience for many in the working generation. Most of you do not know a time when ‘this was normal,’ right?
That is precisely why there is no need to panic. However, there can be a significant difference a few years from now between going through life without knowing anything and living while being aware that ‘these changes are happening now.’
Whether it is your mortgage repayment plan, the allocation of your savings and investments, or your retirement fund preparations—if you have thought, ‘I should properly check this at least once’ for any of these, then writing today’s article was worth it.
Interest rate trends remain unpredictable. Let’s continue to think about this together.
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