Life with Interest Rates: Turn Benefits to Household Finances into Virtuous Economic Cycle

Editorial

15:43 JST, December 4, 2024

With the Bank of Japan working to normalize its monetary policy, yields on financial products have improved and benefits for household finances have been expanding. It is important to link this to a virtuous cycle in the Japanese economy to restore its vitality.

Nippon Life Insurance Co. plans to raise the yields it offers policyholders on annuity and whole life insurance policies for individuals for the first time in about 40 years starting in January next year. The company says this is because the environment for fund management has improved since the negative interest rate policy was lifted in March.

For policyholders, the premiums they pay will be lower. For example, if a 20-year-old man takes out an annuity insurance policy with the amount of benefits set at ¥10 million and accumulates them for 45 years, the premiums will drop from about ¥9.28 million to about ¥8.85 million.

With the central bank raising its policy interest rates, a “world with interest rates” has arrived in earnest. In the process of shifting to a growth-oriented economy in which wages and investment both increase, yields on financial products can also be expected to rise.

It is important for households to enjoy the benefits and allocate them to investment and consumption to achieve a virtuous economic cycle.

After the collapse of the bubble economy, deflation persisted for a long time and the economy stagnated. As a result of the BOJ’s continued policy of ultra-low interest rates implemented to shore up the economy, it was households that suffered excessive burdens.

In the early 1990s, it was not unusual that interest rates on fixed deposits exceeded 6% per year, but since the 2000s, interest rates have been almost nonexistent. It is estimated that households may have lost hundreds of trillions of yen in interest income over the past 30 years.

The Japanese economy is at a juncture where it should move into a new phase of growth.

This spring, major banks have already raised their interest rates on ordinary deposits for the first time in 17 years. In addition, the use of the Nippon Individual Savings Account, an investment program that offers tax exemptions on gains from small investments, is increasing, and interest in investment options is likely to grow.

In line with this trend, it is desirable to also improve education on investment risks.

The improvement of productivity for private companies will hold the key for the Japanese economy to continue to grow. Banks’ earnings have improved markedly in response to rising interest rates. The role of financial institutions in providing funds for growth is becoming even greater.

Three megabanks, including Mitsubishi UFJ Financial Group, Inc., all posted record earnings in their interim financial results for the half-year period that ended in September 2024 mainly due to improved interest margins on loans. Regional banks also posted a spate of strong results.

It is hoped that banks will actively supply funds for nurturing startup companies and supporting small and midsize enterprises, among other purposes, while returning their profits to depositors.

(From The Yomiuri Shimbun, Dec. 4, 2024)