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Individuals’ money shifting to “safe and secure” time deposits with banks

1, 28. 2009

   Amid the tumultuous fluctuations of stock prices and foreign exchange rates in the wake of the financial crisis started in the United States, individuals' money is flowing into safe and sound fund management, such as time deposits with banks. This movement runs counter to the "savings to investments" campaign promoted by the government to follow the foot steps of the United States, but it does not seem to change its direction for some time to come.

Time deposits began increasing after subprime loan problem surfaced

   Individuals who have been investing their money in corporate stocks and investment trust are returning to time deposits with banks as the target of their investments. According to the "money stock preliminary report for December 2008" made public by the Bank of Japan on Jan. 13, 2009, time deposits with banks and other money equivalent rose 1.8% in 2008 over the previous year, a high increase rate marked for the first time in 17 years.

   The time deposits started to rise in the summer of 2007 when the subprime mortgage problem came to surface after hitting the bottom in the spring of 2006 when the central bank called off the quantitative monetary relaxation policy. For monthly comparison, they showed an increase of as high as 2.8% on year in December 2008. Monthly increase rates of more than 2.0% have continued to be registered since July 2008, indicating the shift of individuals' money to "stable asset" because of the decline in share prices and high exchange rate of the yen, and dwindling economic condition.

   According to the Bank of Japan, the balance of the individuals' time deposits with banks, excluding the Japan Post Bank, stood at about 190,700 billion yen at the end of November 2008. Increases in the time deposits are more conspicuous in rural areas where the move toward "investments from savings" was lagging behind the urban areas. Such increases were marked in the seven regions, excluding the Kanto and Tohoku regions, in November 2008, compared with the previous month.

Individuals' money increasingly converging on banks

   The sale of investment trusts, in the meantime, slowed down sharply with the decline in share prices. According to the Investment Trust Association, Japan, the net asset balance of the publicly offered stock investment trust stood at 40,585.7 billion yen at the end of November 2008, down 3.7% from a month earlier. The balance represented a decrease of more than 40% compared with the peak registered in October 2007.

   It was during the Koizumi administration when the government took the "from savings to investment" policy to encourage the individual investors to shift their funds they had in such forms as the time deposits with banks to investments in corporate stocks or investment trust. Against this background, banks have been making efforts in promoting the sales of investment trusts for the past years.

   For the banks today there is nothing good about increasing deposit holdings that increase the burden of deposit insurance payments. They also decrease the net worth ratio that indicate the soundness of management. Further, banks that hold a large amount of savings deposits are likely to be pressured by the Financial Services Agency to increase loans to smaller businesses. Savings for the banks now are nothing but "liabilities".

   In case of the bankruptcy of a bank, the "payoff" provision would be invoked to protect the bank from the withdrawing of a deposit beyond 10 million yen and payment of interest on such deposit. A safety net to save a bank before it goes bankrupt was completed, however, in December 2008, when the revised financial function strengthening law that allows capital investment using public funds in banks with sound management was put into force.

   During the time of financial crisis in the past, banks offering high interest rates were labeled as "unreliable banks". Because of the revised law, however, the legend that "banks never go belly up" is revived. As money can be put into savings deposits with banks with the feeling of trust, it is likely that individuals' money will keep flowing into banks increasingly in the future.

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