I’m no good at economics lol
In: 4812
I’m going to use dollars because I’m not sure of Yen figures, but the principle is the same.
What they’ve done is double the amount of interest payable on a loan. Think of interest as the cost of borrowing money. If I lend you $10 I’ll charge you 10% interest so you’ll have to pay me back $11. That’s my condition for lending you that money.
If you have a home loan, a portion of your repayments is going towards interest. Your loan is for a set term and they calculate your repayments to factor in the interest so that come the end date of your loan term you’re making your final payment.
When interest rates rise, you’re now paying more money on the loan balance, which means higher repayments to ensure the loan is paid off on the final date.
Future market movements aren’t factored into repayments so you pay what the current rate is. You can choose to lock in your interest rate, so if it rises you continue paying the old lower rate. But if you do lock it in and the rate drops instead of rises you’re still paying the old (now higher) rate.
For your specific question a rise from 0.25% to 0.50% sees a doubling of the interest owed on your loan.
So let’s say your repayments are $3500 a month. For the purpose of this example only, $400 of that is covering the interest accrued. By doubling the interest rate, that monthly repayment now rises to $3900. So that household now needs to find $400 extra a month.
If people have taken out loans will within their means, that extra repayment amount should be easy to find in savings, though it might mean some lifestyle adjustments or a reduced savings amount. The problem (and panic) comes from the fact that when people apply for loans they’ll receive a maximum loan amount based on their ability to repay at time of lodgement, and will generally look at homes/places that will cost the full loan amount. So if they’re approved for a million dollars they’ll buy a home worth at or close to a million dollars. Then when rates rise, that loan amount (which was based on their ability to repay at time of lodgement) now becomes beyond their means to repay comfortably so they either need to take money from other areas of their life to maintain payment, or start missing payments and risk defaulting on their loan and losing their loan collateral (the house).
It’s not causing panic, why do you say that?
It’s now twice as expensive as before to get a loan. Which means investing is much more expensive, and there will be less of it.
Imagine that every child on a street had their allowance cut in half. The ice cream man would be in a panic. There’s far less money floating around; business is going to be terrible.
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Oh wow, been waiting for this for awhile. Boj has had yield curve control for awhile to keep rates low, basically printing money and causing inflation in exchange for setting rates below market. It was going to happen as all other central banks have raised rates but Japan has remained the last holdout.
By raising rates they have admitted defeat, the markets are stronger than the polite Japanese fiction that things could go back to the way they were.
And also convexity. Raising rates from .25 to .5 is a lot more damaging than 7.25 to 7.5, even though it is the same amount percentage wise. Basically the cost of capital has doubled, but I think breaking the bank of Japan is the more important thing psychologically. It means that there are limits and we now have trade offs.
When a central bank raises interest rates, it raises the rate at which banks have to loan each other money. Although the rate is still super low, increasing rates makes lending and borrowing slow down. The reason it is a big deal for Japan to do it, is because they have a gigantic debt to GDP, and have had rates at or below .5, or even negative, since the mid 90s I believe. This coupled with their recent extreme currency volatility, people are probably wondering if we are seeing major sovereign nations financial systems starting to fall apart, after decades of QE and kicking the can down the road. Many believe we are on the cusp of a gigantic shit-storm, where the current monetary system is going to fail.
The rise in borrowing costs has been mentioned which is true, but it also represents a bit of a paradigm shift that was a surprise to markets.
The Japanese central bank had been keeping rates effectively zero whilst other central banks had been rising to manage inflation. Japan has not seen the same inflation as most other markets, for a number of reasons. Japan’s monetary policy remains very accommodative, but this is a move in the opposite direction, albeit somewhat marginal.
The break in rhetoric from the Bank of Japan caught market participants but surprise and markets reacted accordingly; bonds fell to adjust to the new rate regime expectations, equity markets overall fell, financial stocks rose, and the Yen rallied. The Australian stock market fell sharply as a flow on effect – there is a common trade (“carry trade”) whereby you borrow in Japan cheaply to invest in higher yielding markets like Australia. The rise in rates makes this less attractive, especially if there is more of this to come. Investors therefore would have closed out their higher yield paying offshore “long” positions and their “short” Yen position which was the cheap borrowing leg.
It means that the central bank of Japan is admitting that global inflation is real, one of the last to do so, which is causing everyone to freak out cause everyone wants to be in denial and believe that constant economic booms are real and will never end.
Basically the global markets have been in a giant bubble for a long time and everyone’s coming to terms with the fact that that would inevitably lead to a giant bust. Which means a lot of people with a ton of money are probably about to lose a good chunk of it.
The interest rate determines how much money can be borrowed. Oftentimes when families want to buy a house, or buy shares, or when a company wants to buy new equipment, they’ll borrow money from the bank at some interest rate – the higher the interest rate, the more expensive it is to borrow, hence less overall borrowing means less overall spending on those assets. The BoJ is where the banks borrow their money from, so when the BoJ raises interest rates, rates increase for everyone in Japan. The lower spending on assets means the price of them will drop (think price = spending/quantity). This fall in the price of assets can cause a ‘panic’ as investors try to sell what they already own, to get as much for it as they can, as they know that the price will drop further in the future.
I will disclaim that I am by no means an expert, but let me try:
When inflation becomes a problem in our economy, the ‘feds raise the interest rates’, which has been the case after the 2020 US election. These types of shifts typically happen in the time leading up to an election year, and are somewhat of a trend. Many Republicans blamed Biden exclusively for our inflation, but he somewhat inherited it, just like Obama did from Bush in 2008. It’s what you do once you’re tossed the hot potato that determines where the ship will go. Please do not anyone go into politics. I don’t care.
When the interest rates are raised, it slows down the economy enough to cut extra spending. Now we get into supply and demand. Loans from banks for mortgages, car loans, personal loans, business loans, etc are all raised interest rates, which means your monthly and overall total cost is higher. This disencourages spending to cut demand, which raises supply.
If I don’t have an extra $200 to spend at Costco in my huge v8 10,000lb Hummer with 5mpg and $5.00/gallon diesel, then it raises supply, because I’m not buying new jeans, pre-made meals, luxuries, etc. Now the supply has gone up, and the demand has gone down. When the demand is low and supply is high, you must lower the price of your product, which is exactly how this helps slow inflation. That way those old $20 jeans that were $25 last week aren’t $30 next month and tailspin out of control.
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How does any of this relate to Japan? When another market begins to lose trust the dollar (or yen), it’s a sign of a ripple effect of one economy to the next, meaning that issues in the US and other parts of the globe are affecting their economy, (this may or may not include their import and export, I’m not sure) which you don’t want in a global trading market, because you don’t want it to spread elsewhere or spread to a recession.
I don’t think this shook anyone, but the media keeps pressing us on a recession coming in the next year or two, and the sign of Japan also raising their interest rates is like seeing another crack form in your concrete bridge. This might open some eyes wide for the next few weeks to months.
And fucking Russia isn’t helping anything right now either with their conflict with Ukraine, which by the way was the original cause to the gas prices spiking in 2021.
Media will influence the markets, Putins health and outcome will sway a few markets. If Ukraine loses the war, it’ll stir things up. Especially with the winter upon us, who knows what disaster or victory to expect over the next 6 months, but it’ll hit the markets, that’s for sure.
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