Industry Rakes in Over 1 Trillion Yen Amid Government and Bank of Japan Turmoil

In Effect, ‘Burden on the Public’!?

The Bank of Japan’s interest rate hike at the end of July triggered a global stock market decline. Although emergency meetings between the government and the Bank of Japan were held, and numerous “damage control comments” from the Bank’s vice governor were issued, market turmoil persists. Amidst this chaotic drama, there is an industry reaping significant benefits: the banking sector.

The interest rate applied to excess reserves in current accounts has been raised from 0.1% to 0.25%, with the entire industry expected to see “over 1 trillion yen in revenue.” Moreover, this increase in revenue is said to lead to a “real burden on the public.” Experts provide an explanation.

With money deposited by individuals and businesses, the Bank of Japan’s current accounts earn interest.

The impact of the turmoil in the financial markets was likely too significant to ignore. There remains an important aspect of the Bank of Japan’s monetary policy changes made at the end of July that hasn’t been thoroughly discussed. This pertains to the statement: “The applicable interest rate for the complementary current account system will be set at 0.25%.” Below is a somewhat technical explanation, but it is very important, so please bear with me.

Private banks consistently deposit money into the Bank of Japan’s current accounts. Due to the rules of the reserve requirement system, banks are obligated to deposit a certain percentage of the money entrusted to them by individuals and businesses into the Bank of Japan’s current accounts. The minimum amount that must be deposited with the Bank of Japan is called the “required reserve amount,” while the portion exceeding this minimum is referred to as “excess reserves.”

The complementary current account system provides interest on these excess reserves. The Bank of Japan pays interest on the money held in the current accounts, though there is no interest on the current accounts of private banks.

 

1.3 trillion yen in effective “taxes” distributed to banks!?

What’s the problem with this? The amount of excess reserves is enormous. The average balance for July (from July 16 to August 15) was 519 trillion yen. With an interest rate of 0.25%, this amounts to about 1.3 trillion yen annually. This will be distributed directly to the banking industry.

Now, here’s the key point: when this significant amount of money flows from the Bank of Japan to the banks annually, the national treasury payments that the Bank of Japan makes to the government decrease. For the government, this means a reduction in revenue. In other words, the interest that the Bank of Japan pays to banks can be viewed as an effective burden on the public. To avoid misunderstanding, it’s almost like distributing tax-like money to banks.

 

But the story doesn’t end here. As will be discussed later, if there are no adjustments to the Bank of Japan’s monetary policy in the future, the interest on excess reserves will increase every time the policy interest rate is raised. If the increase is from 0.25% to 0.5%, and if excess reserves amount to 500 trillion yen, the interest could reach 2.5 trillion yen annually.