The twilight of Japan's ultra-low interest rate era has cast a long shadow over the financial landscape of the country, bringing to light the escalating pressure of personal debt on the lives of its citizens.
Currently, the growth rate of consumer loans in Japan has surged to its highest level in 16 years, and for the first time, household borrowing has outpaced incomeThis alarming trend has led to dire consequences including an unprecedented rise in personal bankruptcies since the COVID-19 pandemic, coupled with a spike in debt-related suicides.
Concerned about these developments, the Japanese government fears that citizens, accustomed to a sustained period of low-interest rates, may struggle to adapt to the new economic reality and consequently find themselves trapped in financial distress.
Rising Household Debt Levels
While Japan is not the only nation facing debt challenges, the personal debt crisis in the country has begun to show significant risks.
The rapid rise in mortgage rates has continued to elevate housing prices, leading to a situation where the average debt level of Japanese households surpasses the average income for the first time last yearIn 2023, the average debt for households of two or more reached 6.55 million yen, contrasted against an annual income of 6.42 million yen
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This alarming new reality is hitting young families particularly hard.
The latest OECD comparisons reveal that as of 2022, Japan’s household debt-to-disposable income ratio reached a record 122%, starkly standing out when compared to the United States and the United Kingdom.
Of particular concern is the increasing number of young people falling into debt trapsIn 2022, Japan lowered its adult age from 20 to 18, enabling teenagers as young as 18 and 19 to sign consumer loan contracts and apply for credit cards without parental consentFollowing the pandemic, consumerism has driven up borrowing demands, particularly among those in their twenties influenced by advertisements on platforms such as TikTok.
Young adults face an even greater risk of falling into debt crises compared to their older counterpartsBy 2023, the average debt for personal accounts held by those under 29 reached 9.92 million yen, nearly three times what it was a decade agoOfficials from the Financial Services Agency warn that young people lacking stable incomes are especially vulnerable, often incurring debt that takes years to repay.
The Japan National Consumer Affairs Center reports a remarkable increase in consultations related to multiple debts among teenagers and those in their twenties, reaching the highest numbers in nearly a decade for the fiscal year 2023. The surge of inquiries affecting adolescents is particularly striking, nearly doubling by March of this year.
Faced with mounting payments, many borrowers resort to taking out new loans to pay off existing debts, locking themselves in a vicious cycle
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In this scenario, the cost of borrowing is exceedingly highAccording to the Financial Services Agency, most outstanding consumer loans have an interest rate of about 14% to 16%.
Under intense pressure, many borrowers are left with no choice but to declare personal bankruptcyGovernment reports indicate that over 70,000 individuals filed for bankruptcy last year, marking the highest since the onset of the pandemicAccording to lawyer Shigeki Honmuki from the Jusho Law Office, estimates based on court data from January to October this year suggest that bankruptcy filings could reach between 75,000 and 80,000, potentially the highest since 2012.
Suicide rates linked to debt have also hit an 11-year highThe extensive debt issues stemming from multiple borrowing are considered one of the primary factors contributing to an increase in suicide casesIn 2023, the number of such suicides reached 792.
Rising Financial Strains from the Bank of Japan's Policies
In the context of Japan's lost decades, the mounting concern over family debt issues has increasingly surfacedThe current moves by the Bank of Japan to normalize its monetary policy have exacerbated this dilemma.
Unlike other major central banks that have pursued rate cuts, the Bank of Japan has opted to go in the opposite direction by raising borrowing costs, thus increasing the strain of personal debt.
Following the collapse of its asset bubble, Japan's central bank introduced a zero-interest-rate policy in 1999 and has maintained ultra-low interest rates for an extended period.
The side effects of prolonged easing have led to a depreciation of the yen
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This year, historic yen depreciation levels have prompted the Bank of Japan to rethink its monetary policyWith signs of a positive cycle between wages and prices emerging, the central bank voted 7 to 2 in March to end negative interest rates, raising the benchmark rate from -0.1% to a range of 0-0.1% for the first time in 17 yearsAt the monetary policy meeting on July 31, they decided to raise the policy interest rate again to 0.25%.
From an economic perspective, the rise in interest rates will undoubtedly increase the cost of debt for households and individuals.
Analysts have pointed out that in the short term, the Bank of Japan's rate hikes may increase debt burdens for the government, businesses, and individualsHowever, in the long run, raising interest rates can enhance the savings yields for citizens, curb the capital outflow caused by excessive yen depreciation, and it could foster an increased awareness of efficiency, competition, and innovation among businesses, reallocating human resources to more competitive sectors and enterprisesThus, the trend of rising interest rates appears unstoppable.
Currently, about 90% of household debt in Japan is linked to housing costsHowever, the speed at which housing prices are rising far exceeds wage increases, particularly in the Tokyo areaAccording to recent studies from a real estate research company, new apartment prices exceed ten times the average annual salary in JapanThe weak yen has resulted in Japanese real estate appearing relatively affordable for certain overseas buyers, leading to an influx that further inflates housing prices.
Faced with a rising interest environment, roughly one-quarter of households opting for variable-rate loans are unprepared for specific measures to counter the increased repayment demands potentially induced by rate hikes
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