Banks offer a variety of options to customers. (PANA)

From Bank Accounts to Bonds
The flow of money from bank deposits to other savings instruments is clear to see in statistics released recently by the Bank of Japan. Japanese households owned a total of ¥1,411 trillion ($12.8 trillion at ¥105 to the dollar) in financial assets as of the end of September 2004, according to the central bank. Of that, ¥533 trillion ($5.1 trillion) was held in time deposits, a drop of ¥11 trillion ($105 billion) from the same time the previous year.

Meanwhile, the amount of household savings held as government bonds rose by 43.5% during the same period to ¥17.8 trillion ($170 billion), a record high. Increases were also seen in the amount of household assets held in investment trusts, up 9.6% to ¥34.7 trillion ($330 billion), and in foreign currency deposits, up 3.5% to ¥5.6 trillion ($53.3 billion).

Bonds are particularly attractive to individual savers, because they offer both higher yields than time deposits and a government guarantee of the principal at the time of redemption. Eight bond issuances have occurred since March 2003, and all have sold out.

Foreign currency deposits and investment trusts also offer high returns, but in exchange for a certain amount of risk. The interest rates of foreign currency deposits are considerably higher than those paid by yen savings accounts. Although the deposits are subject to the fluctuations of the foreign exchange markets, holders can expect to make considerable earnings if they time their investments well, converting their yen savings into foreign currency at a time of yen strength and converting back when the yen is weaker. When the yen appreciated rapidly to around ¥102 against the US dollar in late November, for instance, Sony Bank saw an influx of around ¥20 billion ($190 million) into its foreign currency deposit accounts.

Sony Bank is an online bank that allows customers to make transactions around the clock and boasts low service charges. Every time the yen edges up against major currencies there is a surge of money from customers eager to take advantage of currency fluctuations.

Change to Deposit Guarantee System
Apart from low interest rates, another major factor behind the flow of household savings into higher-yielding instruments is an impending change in the government's deposit guarantee system. Until now, this system has seen the state insure the full amount of bank deposits, but from April only the first ¥10 million will be covered.

This change was partially implemented in spring of 2002, but the move applied only to time deposits. During a one-year period around the time of this move the total amount of personal savings held in time deposits fell by 26%. Most of that money, however, went into ordinary demand accounts - another safe, if less than lucrative, haven.

As of the end of March 2004, liquid savings accounts containing more than ¥10 million were worth a total of ¥45 trillion ($429 billion). If a shift of funds similar to the one in 2002 occurs in the wake of the April 2005 change, a total of around ¥12 trillion ($114 billion) might be expected to flow out of demand deposits. Financial experts are nearly unanimous in their belief that the bulk of the next shift in funds will be directed into financial products other than bank deposits.

Baby boomers are another factor in the changes affecting Japan's financial industry. As they begin to retire in large numbers in the next few years, many are expected to invest their retirement payouts in financial products other than bank savings accounts. This could add momentum to the asset diversification that is currently underway.

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Copyright (c) 2005 Web Japan. Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.