Wednesday, May 8, 2013

Abenomics and Mortgage Rates

Are the folks at Bloomberg serious:
Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash. While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ ... The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.
Tim Duy has some fun with the fact that Bloomberg makes a big deal out of a one basis point increase in nominal interest rates. Seriously guys. You know – temperatures fell in New York City this week so by your logic – the era of global warming is over. The whole point of Abenomics wasn’t necessarily to lower nominal interest rates but to lower real rates by increasing inflationary expectations. If nominal rates on mortgages are only 1.8% and if inflationary expectations are 2%, then real mortgage rates are negative. Contrast this Japanese rate to the 3.35% rate on U.S. conventional mortgages (as of May 2, 2013) as reported by the Federal Reserve. The fact that nominal rates may have bumped up by a few basis points is not proof that monetary policy is backfiring. Note also that this story admits later that the yen has devalued, which one would think might raise net export demand.


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Nick Rowe said...

Funny thing is: I would have been *more* confident that Abenomics was working if I saw mortgage rates rise (at the long end). It would mean that people expected a strong recovery, which would require the BoJ to raise rates in the near future to prevent overheating and inflation going too high.

Robert said...


First we have reached the ultimate reducto ad absurdum of an article about one basis point (I'm prettty sure I predicted this would happen sooner or later).

Second what will it take to convince nominal experts to get real ?

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