Japan's new monetary policy has opened the door to something Japan has not seen in nearly two decades.
In the coming years, Mr. Satoaki Kanoh - president of plastic manufacturing company Shinshi Co. based in Tokyo, dozens of old machines at the factory need to be replaced. He is concerned that this will cost more money than ever.
Each custom-made movement costs around 50 million yen ($330,000). “I want to replace one every year but I don't have that much money.” “If we have to pay higher interest to borrow, we could be in a really difficult situation.”
The Bank of Japan on Tuesday raised interest rates for the first time in 17 years and abandoned its negative interest rate policy. While the move is more symbolic than anything else – even though interest rates remain near zero – it opens the door to something Japan hasn't seen in decades: a new world. world where it takes more interest to borrow money.
Now millions of Japanese, from small business owners like Mr. Kanoh to first-time homebuyers, are calculating how to adapt to higher borrowing costs after years of prolonged deflation and prices, wages and Monetary costs change little.
How they respond will have huge implications in an economy where small and medium-sized companies employ about 70% of the workforce and personal consumption accounts for more than half of gross domestic product.
Mr. Kanoh is worried that the pace of interest rate increases could be very fast. "If interest rates increase too much and too quickly, Japan will not be able to adapt in time," he said.
His company currently has a loan of about 100 million yen, but it is at a fixed interest rate.
Even for a smaller loan of about 10 million yen, the difference between 3% and 1% would be significant, he said, as an annual interest payment of 3% would be equivalent to an annual salary. month of an employee.
Deflation strategy
Japanese businesses and households have long stuck to the same deflationary strategy: hoarding cash and cutting costs. That puts the economy in a vicious cycle: growth and wages stagnate.
Shedding that deflationary mindset can be difficult, even as prices and wages rise.
While large companies are currently offering their biggest pay increases in decades, it's unclear how much pay will increase for small companies. A Reuters survey on Thursday showed about 60% of Japanese companies expect interest rates to rise to 0.25% by the end of the year. Many said they are looking to increase spending before borrowing costs rise. Eiichi Hagiwara, owner of a Tokyo-based water treatment equipment design company, said higher borrowing costs could eat into small companies' already meager profits.
For him, rising borrowing costs could cause large projects to be canceled because loans are needed to cover materials and other costs in advance. Having to pay interest means lower profit margins.
Mr. Hagiwara said: "Now there is no project that gives big profits." If I don't reduce the price, I won't get any projects." He generally avoids borrowing and prefers to keep cash reserves to cover operating expenses. “You have to make sure you get the minimum profit possible,” he said. “If you borrow money and interest rates go up, you're going to be in trouble.”
Hagiwara only borrowed money once – about 100 million yen, a decade ago, to buy a building for the company's headquarters. But word of the loan quickly spread, and associates and competitors alike said the company was in trouble. Hagiwara then decided to fully repay that debt within half a year of borrowing the money.
Ray of hope
Some business owners, especially those dependent on imports, hope interest rates can finally put a floor under the weak yen. Frequent yen sell-offs have pushed up food and fuel costs.
For Yasunobu Tashiro, owner of a restaurant and a shop selling handbags and imported goods in the hot spring town of Kinugawa Onsen, the yen is a headache. “We are an importer, so the weak yen causes us a lot of trouble when we go abroad,” he said. He said purchases that previously cost the equivalent of $6,700 now cost $10,000.
However, Haruka Yoda, a 29-year-old IT engineer, is more optimistic. He borrowed money to buy a house to live with his wife and one-month-old child. “I feel like even if interest rates increase significantly, our salaries will also increase.”
