Japanese savers move money out of banks as bonds prove more attractive

Japanese households are shifting money out of banks and into government bonds as interest rates prove more lucrative, according to a recent report. For years, Japanese savers kept their cash in bank accounts that yielded virtually nothing, but now government bonds are offering four times the return. The Bank of Japan recently announced it had achieved its goal of raising inflation to 2%, marking the end of a long era of near-zero interest rates.

This shift has prompted some households to move a portion of their US$7 trillion in cash holdings out of bank deposits and into government bonds, which now pay yields of 2% or more. Despite this trend, household holdings of government bonds still only account for less than 1% of their total financial assets, compared to roughly 2% for US households' holdings of Treasury securities.

While policymakers hope households will become bigger buyers of government debt to help fund the massive budget, some lawmakers are considering measures to make JGBs even more attractive, such as offering longer-duration products and preferential tax treatment. However, commercial banks worry a large-scale shift into bonds could reduce the funds available for lending and potentially weaken the credit-creation function that banks provide.