Japan's savers chase government bonds as deposit rates lag, and banks feel the pinch

Japanese households are finally paying attention to what their money earns. After years of parking cash in bank accounts that paid next to nothing, savers are moving money into retail government bonds, where yields now run several times higher than typical deposit rates. The shift follows the Bank of Japan's declaration last week that it had achieved its 2% inflation target after nearly 14 years of effort, a milestone that closed the era of near-zero rates.

The numbers explain the rush. Retail sales of Japanese government bonds reached about 6 trillion yen in the April-October period, nearly double the same stretch a year earlier. Monthly sales topped 1 trillion yen for three months running. Popular retail bonds are now yielding above 2%, while most bank deposit rates remain below 1%. One-year deposits at some lenders pay around 0.5%, which does not keep pace with inflation.

The story of individual investors is the most vivid part of the trend. Takashi Kamachi, a 46-year-old self-employed businessman in Osaka, moved 600,000 yen (about $3,785) of his teenage son's gift money out of a Japan Post Bank account and into retail bonds. He told Reuters that the bond returns looked far stronger than what banks were offering on time deposits. Many buyers like him are first-time investors drawn by the government guarantee on principal, a safety net that makes bonds feel like a sensible step up from cash.

The scale of the opportunity is large. Japanese households hold roughly 2.5 quadrillion yen in financial assets, and about 1.13 quadrillion yen of that sits in cash and deposits. Yet household holdings of government bonds still make up less than 1% of their financial assets, a far smaller share than American households hold in US Treasuries. Policymakers see that gap as a chance to build a steady pool of domestic buyers for the country's heavy public debt, especially as the central bank scales back its own bond purchases.

Those policy hopes are pushing the government to act. Finance Minister Satsuki Katayama wants to make retail bonds more appealing, and her ministry is studying additional retail products and discussing preferential tax treatment for buyers. Some lawmakers want longer-duration products and inheritance-tax incentives. Critics, however, argue that tax perks would mainly help wealthier households, widening the gap between rich and everyone else.

For the banking sector, the shift raises a different worry. If savers keep moving money into bonds, lenders could lose the cheap deposit funding they have long relied on, leaving them with less capacity to lend. Equities also compete for the same money, since younger investors have been steadily buying stocks in search of higher returns. For now, the move is still modest, but the message from Japan's savers is clear: interest rates are back, and they are no longer willing to ignore them. Readers can review the original Reuters analysis at this report on Investing.com.

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