Overview
An increase in Japan's short-term interest rate to 1.0% could trigger a large movement of household funds into bank deposits, potentially complicating the Bank of Japan's management of short-term interest rates, according to a leading economist at a Tokyo think-tank.
Recent policy context
The Bank of Japan exited a decade-long, massive stimulus in 2024 and raised the policy rate several times through December, reaching a 30-year high of 0.75% that month. Markets are pricing in the chance of a further increase to 1.0% as soon as March or April.
Why deposits could surge
Ikuko Samikawa, lead economist at the Japan Center for Economic Research and a member of a finance ministry panel who regularly participates in BOJ forums, said households tend to move cash into interest-bearing bank accounts as the country emerges from a prolonged zero-rate environment. Historically, Samikawa noted, when the BOJ's policy rate has exceeded 0.5%, households have shifted cash into bank deposits.
That reallocation would boost the total balance of reserves that financial institutions hold with the central bank, which in turn would exert downward pressure on money market rates.
Potential trigger point
"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.
She added that a prolonged era of heavy money printing has made it difficult to predict how funds will move as interest rates rise, underscoring the uncertainty the BOJ may face while normalizing policy.
Balance sheet and reserve dynamics
The BOJ is in the process of shrinking its balance sheet after it expanded roughly five-fold over the past two decades to about 756 trillion yen, driven largely by stimulus measures implemented in 2013. Financial institutions currently hold about 454 trillion yen in reserves with the BOJ.
Samikawa said the BOJ could reduce that balance to around 280 trillion yen without triggering a spike in short-term rates, though she cautioned the precise threshold may shift depending on future growth in bank lending.
Exchange rate reference
The article uses an exchange rate reference of $1 = 154.8700 yen for the yen-dollar conversion used in reporting the central bank's balance sheet figures.
This report presents analysis and quotations provided by a senior economist on potential fund flows and implications for the Bank of Japan's policy operations.