These Will Be The Winners And Losers When Bank Of Japan Ditches Negative Rates
BOJ Governor Kazuo Ueda has already tried to reassure market players, company boardrooms and policymakers that the central bank isn’t looking to push rates sky high.
(Bloomberg) -- The Bank of Japan’s steady march toward raising interest rates for the first time since 2007 begs the question of who will win and who will lose after years of massive stimulus and ultra-low borrowing costs.
Higher interest rates will have a direct impact on the government, companies, banks and households, while a potential strengthening of the yen would trigger ripple effects on businesses, consumers and tourists. Flows of money and securities may also change if higher returns are available in Japan, adding to the wide-ranging fallout.
BOJ Governor Kazuo Ueda has already tried to reassure market players, company boardrooms and policymakers that the central bank isn’t looking to push rates sky high. But one thing’s for sure for now, the only direction for interest rates in Japan is up.
Higher Interest Rates
While Prime Minister Fumio Kishida’s government and the central bank appear largely aligned about scrapping negative rates in the coming weeks they will likely be among the biggest losers financially from the decision.
More costly borrowing is bad news for a government with the developed world’s biggest public debt load at more than twice the size of the economy.
Japan’s Finance Ministry has already raised its provisional setting for a key rate used to calculate the country’s interest payments for next year to 1.9% from this year’s 1.1%, reflecting the recent rise in government bond yields. As a result, Japan’s debt-servicing costs are projected to reach ¥27 trillion ($180 billion) — around a quarter of the annual budget — in the fiscal year starting in April, according to the ministry.
Higher short-term rates would likely put further upward pressure on yields across the yield curve.
Read more: Japan Sees Debt-Service Costs Hitting $228 Billion in FY2027
The BOJ could face some discomfort of its own from a policy pivot. If the bank raises current account interest rates, what it pays out could exceed the yield on a portion of its JGB holdings, creating a “reverse spread” that pushes it toward the red. Meanwhile, its massive bond holdings, worth more than the annual output of the economy, would suffer paper losses as the yield curve heads north.
Banking Boom
Among the potential beneficiaries would be financial institutions, especially regional banks over the longer term.
Japan’s long-standing low-interest environment has eroded the profitability of local banks by reducing their loan-to-deposit operations. Executives in the sector have in recent months amplified their calls for an end to negative rates.
The picture is complicated by each bank’s holdings of bonds that may suffer paper losses, requiring action to shore up capital, so some financial institutions may still end up as losers overall depending on their asset holdings.
Still, Hideo Oshima, a senior researcher at the Japan Research Institute, estimates that just the end of the negative rate would likely have a favorable impact of about ¥100 billion on the regional banking sector over several stages, as floating rate loans allow banks to widen their margins.
Read more: Japan’s Biggest Bank Readies for BOJ Rate Liftoff This Month
Mortgage Pain
In Japan, nearly three-quarters of homebuyers opt for floating-rate housing loans linked to the BOJ’s short-term interest rates, according to Japan Housing Finance Agency’s latest report. If the BOJ discontinues its negative rate policy, the rates are expected to rise over time, first squeezing homeowners and then feeding into higher rents.
If the BOJ were to hike rates to 2% — still an unlikely prospect — it would increase mortgage payments for young mortgage holders by ¥350,000 per year, according to Shinichi Nishioka, senior economist at the Japan Research Institute. That would likely impact consumer spending, putting a drag on the economy.
Higher mortgage payments could also deter consumers from buying houses, potentially cooling Japan’s property market and hitting real estate companies. Still, there are stipulated limits on how much mortgage payments can rise and with interest rates unlikely to spiral higher, the actual impact both on housing loans and the property sector may end up less than feared.
Zombie Wipeout
The rise in borrowing costs could pose a challenge for many low-profitability companies and increase the number of bankruptcies, especially among so-called zombie firms that have been sustained by easy credit for a long time.
The number of these companies reached 251,000 in 2023, accounting for 17.1% of all firms in Japan, according to a survey by Teikoku Databank.
The demise of inefficient debt-ridden companies may be a tonic for stronger overall growth in Japan’s economy over the longer term.
Read more: Japan’s Zombie Firms on Rise as BOJ Paves Way for Rate Hike
Consumer Debt
Historically Japan has not seen much turbulence associated with credit cards. Delinquency rates were around 2.73% in fiscal year 2022, compared with more than 10% in the US.
In the US, the Federal Reserve’s hiking campaign helped lift the average rate for credit cards issued by commercial banks to a record 22.8% in August. As a result, credit card debt has ballooned to $1 trillion, and delinquency rates hit a decade high.
Japan is not entirely free of such risks. Its household debts account for 122% of net disposable income, more than in most advanced economies.
Exporters
Japan’s biggest exporters and companies with a large global presence such as Toyota Motor Corp., SoftBank Group Corp. and Tokyo Electron Ltd. have benefited from the weakest yen levels in decades, a currency factor that inflates their overseas earnings when converted into yen.
The world’s biggest carmaker says its operating profits are boosted by ¥45 billion for each strengthening of the dollar by ¥1. That lines them up among the players likely to take a hit if rates go up and the yen eventually gets a lift.
Japan’s trading houses, one of Warren Buffett’s investment targets, are also on the list of firms that have benefited from a cheap yen.
While the initial move by the BOJ won’t set a fire under the yen, Japan’s currency will strengthen if the central bank continues to hike rates and especially if the Federal Reserve cuts US rates. Both factors would contribute to rate differentials that are among the factors driving the currency market.
Importers, consumers
On the flipside, importers and power-intensive businesses are among the firms that may benefit if the yen strengthens. Cheaper fuel and food imports will also be welcome news for wine drinkers, cheese lovers and car drivers. The possibility that a stronger yen also helps lower inflationary pressure would also limit the strains on household budgets.
Asset implications
Japan’s international portfolio investment is close to $4 trillion. The likely upward movement in rates won’t trigger a huge repatriation of these holdings, but it may slow further outflows. Japanese investors are the biggest holders of Treasuries outside the US in addition to owning about 10% of Australian and Dutch public debt.
Higher rates and yields would be good for life insurers going ahead, but bad for the balance sheets of those financial institutions that already have high exposure to Japanese bonds.
While Japanese investment money could potentially flow into domestic stocks, a stronger yen may turn out to be a larger factor weighing them down.
Yen movements that deflate the value of overseas assets while pumping up the worth of Japanese securities will affect foreign holders of Japanese stocks and Japanese holders of overseas equities. Still, the impact will also depend on what kind of currency hedging investors have in place.
Tourists
Japan has become an affordable bucket-list destination and even a regional shopping hub as the yen plunged from an average of ¥79.8 against the dollar in 2012 to ¥140.5 in 2023. That’s helped push monthly visitors above the 2 million mark and pulled in money for the hospitality sector, retailers and sightseeing regions. A move in the opposite direction may cool the growth in numbers and the inflow of cash.
At the same time, Japanese with wanderlust will benefit if a stronger yen helps ease the soaring prices of international travel.
--With assistance from Yumi Teso, Lisa Du, Taiga Uranaka, Yoshiaki Nohara, Momoka Yokoyama, Toru Fujioka, Tsuyoshi Inajima, Shoko Oda and Masaki Kondo.
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