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Saturday, July 5, 2003

Q&A

Interest-rate hikes: good news or bad?


Staff writer

Long-term interest rates surged this week. Is it good news or bad?

Here are some questions and answers:

Q. What are long-term interest rates?

A. Long-term interest rates Japan usually mean yields on 10-year government bonds, which are the most heavily issued and traded of the various government bonds. The yield is a return on the bond investment described by percentage.

The rates serve as the benchmark for other long-term loans, such as mortgage loans and lending to companies.

Q. What does a rise in the rates indicate?

A. A rise in interest rates and a fall in bond prices are two sides of the same coin: The more bonds are sold in the market, the lower the prices. If you buy the same bond cheaper, you can effectively get higher interest rates.

Long-term interest rates are often seen as a gauge to measure economic outlook. A recovery, for example, boosts corporate demand for funds, which in turn pushes interest rates.

Q. Does the recent rally mean the nation's economy is getting better?

A. Many experts don't think so. They believe funds have been shifting from government bonds to Japanese stocks, but that rising shares do not necessarily signify a recovery.

Tokyo stocks started to advance earlier this week, supported by aggressive purchasing from overseas institutional investors who expected little scope for a further plunge in stocks. That prompted domestic investors to sell their bond holdings to buy stocks, market participants say.

Q. How does the rate surge affect daily life?

A. The bad news is that it pulls up interest rates on banks' long-term lending, such as mortgage loans. Current loans with fixed-rates will not be affected, though.

The good news is that interest rates on long-term time deposits and bonds are also expected to rise.

For example, the Finance Ministry on Thursday set the coupon rate for 10-year government bonds to be issued later this month at 0.9 percent, higher than the 0.5 percent rate for the bonds issued last month.

Q. What about the impact on corporate activities?

A. Banks will raise interest rates on long-term lending, which would hit struggling companies hard.

This could be a boon to banks themselves, which can make more profit. But at the same time, higher interest rates -- meaning lower bond prices -- cause latent losses in banks' massive bond holdings.

Q. Does the government need to worry?

A. Yes. The government, which is laden with snowballing debts, now needs to pay higher interest rates on outstanding bonds.

Q. Will the rates continue to rise in the future?

A. They could. But economists do not expect any rise in interest rates to continue for long without solid economic conditions in place.



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The Japan Times

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