Japanese household depositors are struggling with high prices, and higher interest rate income from the BOJ's recent rate hikes should provide some relief.
Bank of Japan Governor Ueda Sept 3 Tokyo

Bank of Japan Governor Kazuo Ueda takes questions from reporters after meeting with Prime Minister Shigeru Ishiba on September 3. (©Sankei by Ataru Haruna)

The United States Federal Reserve Board (FRB), America's central bank, opted not to raise rates on September 17. Instead, it cut its policy interest rate by 0.25%. Meanwhile, the Bank of Japan decided two days later, on September 19, to keep its policy interest rate unchanged. These decisions have different implications for businesses and household depositors.

The Bank of Japan head office in Chuo-ku Tokyo. (©Kyodo)

Generally, when the topic turns to interest rate hikes, the Japanese media tends to emphasize only the negative aspects, such as rising mortgage rates and tighter corporate cash flow. Yet, interest rates have far more complex implications than that.

Currently, Japan's consumption tax rate is 10%. If it were to lower the consumption tax to 8% for certain items, like food and beverages, increase the real wages of working people (wages adjusted for inflation), and raise pension payouts, the lives of Japanese citizens would become considerably easier. 

However, Japan's consumption tax is also linked to social security spending. And the ruling Liberal Democratic Party's tax system research commission has opposed any reduction, arguing it would undermine the funding source for social security. Meanwhile, real wages cannot increase unless employers raise wages above the inflation rate. 

The hurdle for wage increases is particularly high for small and medium-sized enterprises with limited financial resources. Regarding pensions, as long as the government maintains the macro-slide mechanism — where pension payments do not rise significantly even as the price level increases, effectively lowering living standards — it will be difficult for payments to exceed inflation.

A Look At Benefits and Hardships

Certainly, if interest rates rise, those taking out mortgages and those who already have variable-rate mortgages will see their repayment amounts increase compared to before the rate hike. That would cause them hardship. However, there are also quite a few people in Japan whose lives would become easier as their interest income increases due to rising deposit rates. Particularly among the elderly, many are curbing consumption and accumulating savings that earn no interest. If interest rates rise, their lives should become a little easier.

Japanese households have a high propensity to save. According to the "Comparison of Financial Flows in Japan, the US, and Europe" published by the Bank of Japan Statistics Bureau on August 29, 2025, Japanese households hold over half of their financial assets in cash deposits. 

In contrast, US households hold over half of their financial assets in stocks and mutual funds. Cash deposits account for only 11% — a stark difference from Japan. Japanese households also hold a higher proportion of their financial assets in cash deposits compared to households in Europe. This is despite interest rates being near zero.

Average Savings in Japan

According to the Ministry of Internal Affairs and Communications, the average savings amount for households with two or more members in 2024 was ¥19.84 million JPY ($131,000 USD). That represents a year-on-year increase of +4.2%. (The median was ¥11.89 million or $78,600.) Of this, 27% was in time deposits and 35% in currency deposits (including foreign currency deposits). Combined, deposits accounted for 62% of savings. 

Megabank signs line the streets of Toyosu Station in Tokyo. (From left: Mitsubishi UFJ Bank, Mizuho Bank, Sumitomo Mitsui Banking Corporation)

According to the ministry, the average balance of ultra-low-interest yen time deposits showed a slight decrease, while high-interest foreign currency deposits continued their upward trend. This suggests an increasing number of depositors are accepting exchange rate risk to shift funds into high-interest foreign currency deposits.

The Japanese government has attempted to redirect individual financial assets from savings to investment through the Nippon Individual Saving Account (NISA) scheme launched in January 2014, and the revised New NISA introduced in January 2024. Ultimately, much of the investment capital mobilized by NISA and the new NISA flowed into international diversified investments, such as global equity index funds and US stock index-linked funds, rather than into Japanese stocks or Japanese stock-focused mutual funds. 

In 2024, securities (including stocks and investment trusts) accounted for 19.0% of the average savings of households with two or more members, an increase from 13.3% in 2019. However, this still did not surpass the proportion held in deposits. The Japanese preference for saving remains largely unchanged.

A Deeper Look at Household Savings

In 2024, the average savings amount for households with two or more members where the head of household was 65 or older and unemployed, was ¥25.6 million (about $170,000), a +2.2% year-on-year increase. Of this, 34% was held in time deposits and 31% in demand deposits, totaling 65% held in deposits. 

The proportion held in securities was 19.6%, up from 16.1% in 2019. However, Japan's elderly population also strongly favored saving through deposits. And some appear to be trying to accumulate even more savings than they can fully utilize. 

Considering that many younger people also hold deposits, raising interest rates is beneficial for household savings overall. Indeed, deposits at internet banks offering higher interest rates have surged, sparking competition among these banks to attract depositers. If depositors increase their spending with the additional interest income, the economy should expand somewhat.

A Longtime Preference

Japanese people have always preferred bank deposits. The reason for their high propensity to save was that depositing money in a bank earned interest income, supplementing their livelihood. 

From 1980 to 1990, bank fixed deposit interest rates were 6 to 7%. This allowed depositors to increase their assets simply by keeping money in the bank. Moreover, at that time, there was a system called the Small Amount Savings Tax Exemption (Maruyuu), which exempted interest earned on bank deposits up to ¥3 million (about $20,000) from income tax and resident tax. 

A separate tax exemption system for postal savings also existed then. This system applied to all individuals. However, starting in 1987, eligibility was gradually restricted, and it was finally abolished on January 1, 2006.

Bank of Japan Governor Kazuo Ueda holds a press conference in Osaka on October 3. (©Sankei by Kazuya Nemoto)

Rooted in an Era of Solid Growth

The bank I joined as a rookie employee in 1976 could absorb funds by issuing financial bonds under the Long-Term Credit Bank Act. Its five-year term offered an annual interest rate of 7.388%. Even if withdrawn early, it accrued interest at the 1% rate of a regular savings account. It was also a financial product that, when compounded, grew to 1.5 times the principal over five years. Furthermore, using the Maruyuu tax exemption. It was a good era for depositors.

At the same time, fixed-rate savings accounts at post offices located throughout Japan offered 6.5% interest over six months. Compounded annually, this yielded 7.12% after one year, 8.21% after two years, and doubled the principal after ten years.

However, after the bubble burst, ultra-low interest rates persisted until recent years, leaving depositors unable to expect interest income. For a year's fixed-term deposit of ¥1 million ($6,600), the bus fare from home to the bank would wipe out the entire year's interest income — a bizarre situation that continued for a long time.

Rising Deposit Rates

In January 2025, Japan's policy interest rate was raised from 0.25% to 0.5%, prompting bank deposit rates to rise across the board. This marked the first time rates reached 0.5% in 17 years. 

Some analysts anticipate further rate hikes going forward. For Japanese depositors struggling with high prices, the increased interest income from these rate hikes should provide some relief, however modest, acting as a buffer to ease their lives. Indeed, a trend of shifting deposits to banks offering higher interest rates is already visible.

Media reports often portray a scenario where rising interest rates will cripple Japan's finances and make borrowing difficult for companies, as if problems were piling up. However, it is also true that many ordinary citizens are eagerly awaiting an increase in deposit interest rates. 

RELATED:

Author: Yoshifumi Fukuzawa

Leave a Reply