US long-term interest rates at 24-year high: How to interpret home loans and NISA on a day of yen depreciation and stock price declines
US long-term interest rates have reached a 24-year high, the yen has fallen by more than one yen, and Tokyo stocks have also declined. This article delves deeper into the content of the YouTube evening edition broadcast the previous night. To state the conclusion first, this does not mean that the repayment amounts for Japanese variable-rate home loans will change today. However, it will affect fixed interest rates, import prices, and NISA valuation amounts with a time lag. When borrowing 30 million yen over 35 years, a difference of 0.1 percentage points in interest rates amounts to a difference of approximately 1,400 yen per month, or about 590,000 yen in total over 35 years. I will organize the meaning of these figures in order.
High interest rates, a weaker yen, and falling stock prices coincided on the same day
I will organize the events covered in the previous night’s evening edition as facts.
First, US long-term interest rates (10-year Treasury yields) rose, reaching their highest level in 24 years. US long-term interest rates can be confirmed through market data published by the US Treasury Department and the Federal Reserve (FRB). In response to this, US home loan interest rates (30-year fixed) have risen to the low 7% range. The primary source for US home loan interest rates is the survey published weekly by the major housing finance company Freddie Mac.
Second, in the foreign exchange market, the yen was sold, leading to a depreciation of more than one yen. Third, the Tokyo stock market declined due to selling ahead of the release of US employment statistics. High interest rates, a weaker yen, and falling stock prices all coincided on the same day.
On the same day, two important statistics were released domestically. According to the Tankan (Short-Term Economic Survey of Enterprises in Japan) published by the Bank of Japan, the business condition DI for large manufacturing companies improved for the sixth consecutive period. The September Consumer Price Index for the Ku-area of Tokyo (preliminary figures for mid-month), published by the Statistics Bureau of the Ministry of Internal Affairs and Communications, rose 2.7% compared to the same month of the previous year. Since the CPI for the Ku-area of Tokyo is published about one month ahead of the national CPI, it is a figure that the market pays attention to as a leading indicator of national prices.
In summary, pressure from rising interest rates from overseas and figures indicating the resilience of the economy and prices from within Japan coincided on the same day.
Interest rate differentials, position adjustments before employment statistics, and domestic factors also overlap
Let’s consider why these three things moved simultaneously by separating them by causal relationship.
The direct reason for the yen’s depreciation is the interest rate differential between Japan and the US. When US interest rates rise, it becomes easier for movements to sell the yen and buy the dollar because the yield is higher when investing in dollars. What is often overlooked here is that it is long-term interest rates that moved, not short-term interest rates. Short-term interest rates are almost entirely determined by the central bank’s policy rate, but long-term interest rates are determined by how market participants view future economic conditions, prices, and the supply and demand for government bonds. In a phase where long-term interest rates are rising, factors such as concerns about fiscal policy and an increase in the supply of government bonds are easily mixed in, in addition to policy outlooks. As mentioned in the previous night’s evening edition, the direct trigger for this rise in US interest rates cannot be determined within the scope of information confirmed at this time.
There are two factors behind the decline in stock prices. One is that rising interest rates push up corporate borrowing costs and lower the present value of future profits, making stocks relatively less attractive. The other is that investors who want to see the results of the important employment statistics indicator reduce their positions just before its release. The latter is a scheduling factor rather than a seasonal one, and it is of a nature that will be resolved once the results of the indicator are out, which has a different time axis from the former.
Then there are domestic factors. The Tankan survey shows that business sentiment among large manufacturers has improved for six consecutive quarters, and the Tokyo area CPI has risen by 2.7%, maintaining a level above the Bank of Japan’s 2% inflation target. This means that the Bank of Japan has more material to consider for additional interest rate hikes. Because upward pressure on interest rates from overseas coincided with the resilience of the domestic economy and prices on the same day, we view this as an environment where upward pressure on Japan’s long-term interest rates is likely to persist. Japan’s long-term interest rate is the benchmark figure for fixed-rate home loans, which leads to the calculations in the next section.
How to Prepare with Household Finances, Home Loans, and NISA/Investment
From here on, we provide calculations and action plans. We will present the figures after clarifying the premises.
Regarding home loans. First, the figure of 7% for US home loan rates is a US-specific matter and does not mean that Japanese interest rates are heading toward that level. In Japan, variable-rate loans are primarily linked to the Bank of Japan’s policy rate via the short-term prime rate, while fixed-rate loans are reviewed monthly by each bank based on long-term interest rates. Therefore, movements in long-term interest rates are more likely to appear first in the fixed rates for those who are about to borrow or refinance.
As a calculation, consider borrowing 30 million yen over 35 years, with equal principal and interest payments and no bonus payments. At a 1.0% interest rate, the monthly payment is approximately 84,700 yen. At 1.1%, it is approximately 86,100 yen, a difference of about 1,400 yen per month, about 17,000 yen per year, and about 590,000 yen over the 35-year total. If the increase is 0.3 percentage points to 1.3%, the monthly payment becomes approximately 88,900 yen, and the difference from 1.0% widens to about 4,300 yen per month and about 1.8 million yen over the 35-year total. Even if the interest rate difference seems small, the length of the period amplifies the difference.
There are three
action plans.
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Check your interest rate type and the next interest rate review date using your contract documents or bank app. Variable-rate loans often have a “5-year rule” that keeps payments fixed for five years, and a “125% rule” that limits the revised payment to 1.25 times the previous amount. However, these are mechanisms to prevent sudden changes in payment amounts, not to reduce the total amount of interest. You should check if your contract includes these rules, keeping in mind that unpaid interest can still accrue.
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Those who are about to borrow or are considering refinancing should confirm with their financial institution whether the interest rate at the time of application or the time of execution will be applied. In a phase where long-term interest rates are moving, this difference can amount to hundreds of thousands of yen.
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Those considering funds for early repayment should apply the payment amount in the event of an interest rate hike to the calculation above to understand the upper limit that their household budget can absorb. This assumes that there is no need to rush by dipping into your emergency savings (as a guideline, about 6 months’ worth of living expenses).
Regarding prices. For a household with monthly expenditures of 300,000 yen, if we simply assume that total expenditures rise by 2.7%, the same as the Tokyo area CPI, this corresponds to an increased burden of approximately 8,100 yen per month, or about 97,000 yen per year. Yen depreciation works to further push up this burden through the prices of imported food and energy.
Regarding NISA. If you hold 1 million yen in an overseas equity investment trust without currency hedging, a 1% depreciation of the yen alone will increase the valuation by about 10,000 yen, but if stock prices fall by 1% at the same time, it will be almost completely offset. If you judge based on only one side—that it will increase because of yen depreciation or decrease because of stock price declines—you are likely to misread the actual movement of the valuation. The reverse is also true; if US interest rates start to fall and the yen appreciates, there may be a phase where the yen-denominated valuation does not increase as much as expected, even if stock prices recover.
There are two
investment action plans.
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For those continuing to accumulate investments, focus not on daily price movements, but on whether your accumulation amount and asset allocation (ratio of domestic to overseas, and stocks to bonds) are according to your plan.
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Understand the ratio of your overseas assets held without currency hedging. If you do not know how your portfolio is designed to be affected by currency fluctuations, you cannot correctly interpret the reasons for changes in your valuation.
Points of focus for the next 24 to 72 hours
The previous night’s evening edition identified the upcoming US employment statistics, followed by the reactions of US long-term interest rates and the dollar-yen exchange rate, as the “next figures to watch.”
Those employment statistics were released by the US Bureau of Labor Statistics (BLS) on the night of Japan time, and the number of non-farm payrolls fell significantly below market expectations. In response, expectations for US interest rate hikes receded, and combined with a decline in crude oil futures, the dollar was sold and the yen turned upward. This means the situation moved, for the time being, in the direction outlined in the evening edition, which noted that “if employment is weak, the opposite movement is likely to occur.” However, long-term interest rates themselves remain at a 24-year high, and the composition of coexisting economic slowdown and high interest rates has not been resolved.
There are 3 figures to watch over the next 24 to 72 hours.
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The dollar-yen rate and the Nikkei Stock Average at the opening of the Tokyo market on Monday. Whether the Tokyo market carries over or reverses the yen appreciation and stock decline seen after the employment statistics will be the turning point for whether the previous night’s “high interest rates, weak yen, and weak stocks” trend continues.
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Japan’s 10-year government bond yield. If US interest rates peak out, downward pressure will also be applied to Japan’s long-term interest rates, but the domestic resilience shown by the Tankan survey and the Tokyo core CPI will work in the opposite direction. Since banks revise fixed-rate mortgage interest rates at the beginning of each month, it is important to keep in mind that the level of government bond yields at the start of the month affects the applicable interest rates for the following month.
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US economic indicators and statements from Fed officials scheduled for early next week. The reaction of US long-term interest rates will change significantly depending on whether the downward surprise in employment statistics is viewed as temporary or as the beginning of a slowdown.
Money Signal’s Perspective
From here on, these are our views based on facts and calculations. We provide the rationale for our views.
As a point often overlooked, while much of the previous night’s reporting focused on US interest rates and the weak yen, we view the two domestic statistics released on the same day—the Tankan survey’s sixth consecutive period of improvement and the 2.7% rise in Tokyo core CPI—as more significant factors for Japanese households over a longer time horizon. The rationale is that the benchmark for Japanese fixed-rate mortgage loans is Japan’s long-term interest rate, and what moves Japan’s long-term interest rate is not only US interest rates but also the Bank of Japan’s policy decisions. If domestic economic conditions and prices remain resilient, there could be a phase where Japan’s long-term interest rates are difficult to lower even if US interest rates stabilize.
As a caution against common misconceptions, we want to avoid reading the headline “US mortgage rates in the 7% range” as a forecast for Japanese mortgage loans. The rationale lies in the fact that the methods for determining interest rates differ. US mortgages are predominantly 30-year fixed rates directly linked to long-term interest rates, but many Japanese borrowers use variable rates, the benchmark for which is short-term interest rates linked to policy rates. The rise in long-term interest rates appears first in the fixed rates for those borrowing or refinancing from now on, not in the repayment amounts of existing variable-rate borrowers.
Regarding the impact on households, we showed a calculation that a 0.1 percentage point difference in interest rates amounts to approximately 1,400 yen per month for a 30 million yen loan, and approximately 590,000 yen over 35 years. What this figure means is that even if the change in interest rates is small, the duration amplifies the difference. The rationale is the calculation of equal principal and interest repayment itself. On the other hand, since NISA has a structure where the weak yen and weak stocks offset each other, it is not appropriate to use only the daily increase or decrease in valuation as a basis for judgment. Because the market shifted toward yen appreciation after the employment statistics, the valuation at the start of the week may move in a direction where the tailwind of the weak yen is stripped away, but this is a currency factor and does not mean the content of the held assets has changed.
As an action to take today, I would like you to check whether your mortgage interest rate type is variable or fixed, when the next interest rate review period is, and whether the 5-year rule or 125% rule is included in your contract, either through your contract documents or your bank’s app. At the same time, I would like you to check the ratio of foreign assets without currency hedging among the products held in your NISA account. The reason is that unless you know where your household finances will be affected regardless of whether interest rates or exchange rates move, you cannot turn news into action.
Summary
US long-term interest rates at a 24-year high, a yen depreciation of over 1 yen, and a decline in Tokyo stock prices. I have organized the events of the day when these three factors overlapped by translating them into mortgage loans, prices, and NISA amounts. While this does not mean that the repayment amount for Japanese variable-rate mortgages will change immediately today, it will have a delayed effect on fixed interest rates through long-term interest rates, on household finances through import prices, and on NISA from both exchange rates and stock prices. As we start the week with a shift toward a stronger yen due to lower-than-expected employment statistics, I would like to monitor the dollar-yen rate and Japanese long-term interest rates to see if the previous night’s trend will continue or reverse.
In the previous night’s YouTube evening edition, I summarized the day’s figures in about 5 minutes. Please watch it along with this article.
https://youtu.be/omea0YS2VFg