June 17 (Asia Today) — The Bank of Japan’s decision to raise its policy rate to 1% for the first time in 31 years is expected to benefit older households with substantial savings while increasing pressure on younger mortgage borrowers and debt-dependent small businesses.

The shift could also affect South Korean companies operating in Japan through exchange rates, financing costs and changes in Japanese consumer demand.

The central bank raised its short-term policy rate from 0.75% to 1% at a two-day monetary policy meeting that ended Tuesday, the Yomiuri Shimbun reported.

The rate is the highest since 1995 and marks another step in Japan’s transition away from decades of ultra-low borrowing costs.

The decision was approved by a 7-1 vote. Bank of Japan Gov. Kazuo Ueda, who was hospitalized for medical treatment, did not attend the meeting or participate in the vote.

The central bank said rising oil prices linked to tensions in the Middle East could weigh on economic growth while also increasing inflationary pressure as companies pass higher costs along to customers.

It said reducing the degree of monetary accommodation was necessary to achieve its 2% inflation target in a sustainable and stable manner.

The rate increase faced little public opposition from the government.

Prime Minister Sanae Takaichi, who has emphasized expansionary fiscal and monetary policies and previously expressed caution about higher rates, did not publicly oppose the decision.

The Yomiuri said the government appeared to accept that another rate increase had become difficult to avoid as inflation and the weak yen increased pressure on households.

The effects on Japanese families are expected to be uneven.

MUFG Bank, Sumitomo Mitsui Banking Corp. and Mizuho Bank said Tuesday that they would raise their ordinary deposit rates from 0.3% to 0.4% beginning Aug. 3.

That would be 400 times the 0.001% rate offered in March 2024, before the central bank ended its negative interest rate policy.

Mizuho Research & Technologies estimated that, in an economy with a 1% policy rate, additional interest income on deposits could exceed the rise in household borrowing costs by about 1 trillion yen, or $6.3 billion, annually.

That would produce an average net gain of about 20,000 yen, or $126, per household each year, according to the research firm.

The benefits, however, are likely to be concentrated among older people who hold larger amounts of financial assets. Younger households with substantial mortgage debt could face higher monthly payments.

Borrowers with variable-rate mortgages are particularly exposed.

An analysis by a Japanese mortgage comparison service found that monthly payments on a 50 million yen, or about $314,000, variable-rate mortgage with a 35-year term would rise by 5,900 yen, or about $37, if the applicable rate increased to 1.25%.

The monthly payment would increase to 147,043 yen, or about $923.

About 80% of Japanese mortgage borrowers use variable-rate loans, meaning even modest rate increases could affect a large share of homeowners.

Higher market rates could also increase the cost of education loans, automobile loans and interest-bearing student loans.

Because rates on those products are often linked to government bond yields and other market benchmarks, borrowers may feel the effects of higher repayments before receiving meaningful gains from deposit interest.

Businesses are also expected to face higher costs.

Mizuho Research & Technologies estimated that recurring profits across nonfinancial industries could decline by about 1%, or 1.1 trillion yen, equivalent to about $6.9 billion.

Smaller companies with heavy debt and narrow profit margins are expected to be the most vulnerable.

The research firm estimated that recurring profits at companies capitalized at less than 10 million yen, or about $63,000, could fall by 6.6%.

For South Korea, the effects are likely to emerge indirectly through exchange rates, financial markets and Japanese domestic demand.

A higher Japanese policy rate narrows the interest rate gap between South Korea and Japan and could theoretically ease downward pressure on the yen.

The yen’s initial reaction was limited, however, because financial markets had largely anticipated the increase.

A stronger yen could improve import margins for the Japanese subsidiaries of South Korean food and consumer goods companies that purchase products from South Korea.

It could also reduce the price advantage Japanese exporters have enjoyed from the weak yen, easing some competitive pressure on South Korean exporters.

South Korean employees stationed in Japan who receive living allowances calculated in won, however, could see their effective income decline if the yen strengthens.

The Bank of Korea’s policy rate remains at 2.5%, well above Japan’s rate.

The gap could continue to narrow if the Bank of Japan raises rates again, affecting the won-yen exchange rate, Japanese investment flows and the performance of South Korean companies operating in Japan.

Japan’s return to a 1% policy rate is therefore more than a domestic step toward monetary normalization. It is also a development South Korean companies and policymakers will need to monitor closely.

— Reported by Asia Today; translated by UPI

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