Part 5: Why are interest rates rising in the first place? Will our lives become more difficult??
Good morning!
This is Koudai, your social-issue-focused financial planner.
Have you been seeing news lately about interest rates rising?
For those of you with a mortgage, this is a concerning topic, isn’t it?
But why are interest rates rising in the first place?
In this post, I will explain it while using as few difficult economic terms as possible!
If you’re wondering what interest rates are to begin with, I’ve explained that in a past blog post, so please take a look.
Reason 1: Because prices are rising
When you go grocery shopping, don’t you feel like prices are higher than they used to be?
When the prices of food, daily necessities, and services go up, the burden on household budgets also increases.
The Bank of Japan implements monetary policy with the goal of stabilizing prices.
To put it simply,
if there is too much money in the market, everyone spends it, which causes the prices of goods to rise.
They raise interest rates to make it harder for people to spend money.
For example, if bank deposit interest rates rise, people keep their money in the bank, and
if mortgage interest rates rise, it becomes harder to buy real estate, so less money flows into the market.
When that happens, goods become harder to sell, which helps to curb the rise in prices.
However, it is not a simple mechanism where “if prices rise, interest rates are always raised.” Decisions are made based on factors including the economy and wages.
Reason 2: Wages and economic trends are also involved
When considering interest rates, not only prices but also wages and the state of the economy are important.
For example, even if prices are rising, if your salary doesn’t increase at all, your household budget will become strained.
On the other hand, if wages rise, corporate activity becomes more active, and the economy reaches a state where prices rise stably, that becomes one of the reasons to review monetary policy.
The Bank of Japan does not look at prices alone.
“What is happening with wages?”
“How is the economy?”
“What is the outlook for future prices?”
They judge interest rates by looking at these points comprehensively.
Reason 3: The fact that Japanese interest rates were too low for a long time is also related.
In Japan, a low-interest-rate policy has continued for a long time to support the economy.
When interest rates are low, it becomes easier for companies and individuals to borrow money, and an effect of boosting economic activity can be expected.
However, if the economic and price situation changes, it becomes necessary to review the monetary policy to date.
Therefore, the Bank of Japan is adjusting the degree of monetary easing while watching the economic and price situation.
Summary
Behind the rise in interest rates are changes in prices, wages, and the economy, as well as the Bank of Japan’s monetary policy.
While rising interest rates are a burden for borrowers, they can also be a plus for those who have savings.
Those who have a mortgage should start by checking their own contract details and household budget, rather than panicking just because of interest rate news.
Next time, we will explain the topic that is often a source of worry when considering a mortgage: “Should I choose a fixed interest rate or a variable interest rate?”
See you next time!