A potential increase in Japan’s short-term interest rate to 1% may trigger a significant shift of funds into bank deposits, potentially complicating the Bank of Japan’s (BOJ) monetary policy implementation, according to a leading economist. The Bank of Japan concluded its decade-long stimulus program in 2024 and implemented several interest rate hikes, reaching a 30-year high of 0.75% in December. Market expectations are leaning towards another rate increase to 1.0% as early as March or April.
Ikuko Samikawa, lead economist at the Japan Center for Economic Research, suggests that as Japan transitions away from a prolonged period of near-zero interest rates, a large-scale movement of household cash into interest-bearing bank accounts could occur. Samikawa noted that historically, when the BOJ’s policy rate has surpassed 0.5%, households have typically shifted cash into bank deposits. Samikawa is a member of a finance ministry panel and a frequent participant in BOJ forums.
An increase in bank deposits would lead to a higher overall balance that financial institutions hold with the BOJ, placing downward pressure on money market rates. “The next anticipated rate hike to 1% could be a trigger point of such inflows… If the flow of funds back to bank accounts turns out to be big, it could complicate the BOJ’s effort to guide short-term interest rates around its target,” Samikawa said.
The BOJ is currently in the process of shrinking its balance sheet, which has expanded five-fold over the past two decades to approximately 756 trillion yen ($4.88 trillion) primarily due to the stimulus measures introduced in 2013. The balance of reserves held by financial institutions with the BOJ currently stands around 454 trillion yen. Samikawa believes that the BOJ can reduce this balance to around 280 trillion yen without causing a surge in short-term rates, while also noting that these figures may fluctuate based on future increases in bank lending.
