<h3><span class="strongInContent">What is the overlooked waste of &#8220;precious financial resources&#8221;?</span></h3>
<p> The Diet has been holding daily debates on pension reform bills, revision of basic tax exemptions, consumption tax cuts, and other issues in anticipation of the House of Councillors election in July. However, the debate has not yet reached the point where it can be substantively discussed in depth, even with regard to financial resources. This is because there is a big gap between the government&#8217;s desire to avoid tax cuts and fiscal spending and the opposition parties&#8217; claims to gain electoral popularity.</p>
<p> What is more serious is that behind this farce, the waste of precious financial resources is being overlooked. It is the BOJ&#8217;s interest on the banks&#8217; &#8220;excess reserves. Why is the government &#8220;subsidizing&#8221; the banking industry, which is doing so well? An expert points out that &#8220;an urgent review is needed.</p>
<figure id="attachment_426762" aria-describedby="caption-attachment-426762" style="width: 4589px" class="wp-caption alignnone"><a href="#" data-ident_hash="7bce561b"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2025/06/00f59821730d93bac8a1b4abe6b3d80b.jpg" alt=""></a><figcaption id="caption-attachment-426762" class="wp-caption-text"> In the fiscal year ended March 31, 2013, the three megabanks posted a combined net profit of approximately 3.9 trillion yen, the highest profit in two consecutive years (three consecutive years if this fiscal year&#8217;s forecast is included).</figcaption></figure>
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<h3><span class="strongInContent"> Even if basic pensions are raised, will consumption taxes be raised in the future?</span></h3>
<p> During the 217th session of the Diet, currently in session, important bills directly related to people&#8217;s daily lives are being deliberated and passed, including a pension reform bill and an increase in the basic income tax deduction. In the deliberation of such bills that involve large fiscal expenditures, financial resources are always at the center of the discussion.</p>
<p> However, the LDP is attempting to pass a pension reform bill, the centerpiece of the current Diet session, that includes an increase in the basic pension, without specifying the source of funding. It states that the bill will be funded by employee pension funds and national taxes, but it does not clarify what national taxes are being used.</p>
<p> The opposition parties are pursuing the issue on the grounds that it may be financed by a future consumption tax hike. The ruling party probably believes that the public will accept a consumption tax hike if it is used to finance pensions.</p>
<h3><span class="strongInContent"> Interest on the Bank of Japan&#8217;s &#8220;excess reserves&#8221; as a source of revenue</span></h3>
<p> In fact, the government has a considerable amount of unused and underutilized financial resources. The reserves in special accounts, formerly known as &#8220;Kasumigaseki reserves,&#8221; are ridiculed as if their existence were an urban legend, but there is no doubt that they exist.</p>
<p> A typical example is the unrealized gains in the &#8220;Special Account for Foreign Exchange Funds&#8221; (commonly known as the &#8220;Foreign Exchange Special Account&#8221;). Even with the yen&#8217;s appreciation, more than 30 trillion yen of unrealized profits are still lying dormant. This can be used entirely as a source of revenue.</p>
<p> There is also something else that at first glance is difficult to understand as a source of revenue. That is the interest on the Bank of Japan&#8217;s &#8220;excess reserves,&#8221; which we will discuss in this issue. This amount has now grown to about 2.6 trillion yen on an annualized basis. This is more than the amount equivalent to a 1% consumption tax (about 2.4 trillion yen).</p>
<p> Moreover, the funds, which should have been incorporated into the government budget, are being returned entirely to the banking industry. The following is an explanation of what is going on, although it will be somewhat difficult to explain.</p>
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<h3><span class="strongInContent"> The Bank of Japan&#8217;s checking accounts earn interest!</span></h3>
<p> Private banks are required to deposit a certain percentage of money deposited by individuals and companies into the Bank of Japan&#8217;s checking account. This rule is called the &#8220;reserve deposit system,&#8221; and the minimum amount required to be deposited with the BOJ is called the &#8220;legal reserve deposit amount.</p>
<p> The amount deposited in excess of the legal reserve deposit amount is called &#8220;excess reserves&#8221; and is subject to interest under the &#8220;supplementary checking account system&#8221; established by the BOJ.</p>
<p> The explanation so far may have left many of you thinking, &#8220;What? Many of you may be thinking, &#8220;What? As anyone who has a checking account at a bank, such as a corporate account, knows, checking accounts do not normally earn interest. However, the BOJ&#8217;s checking account earns interest.</p>
<div data-friday-nextpage-lead=" About 2.6 trillion yen&quot; is a &quot;subsidy&quot; for the banking industry!"></div>
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<h3><span class="strongInContent">The 1% consumption tax is a &#8220;subsidy&#8221; to the banking industry</span></h3>
<p> Do not think of this as a mere interest expense. As mentioned above, it is a huge amount.</p>
<p> As of April 2013, the excess reserves (average balance) to which the supplementary current account system applies amounted to 518 trillion yen. The interest rate applied to this is 0.5%, the same as the policy rate. This means that the annualized interest rate is about 2.6 trillion yen.</p>
<figure id="attachment_426658" aria-describedby="caption-attachment-426658" style="width: 1602px" class="wp-caption alignnone"><a href="#" data-ident_hash="85affc52"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2025/05/bb052652551396e066ed6dae5d7c509d.jpg" alt=""></a><figcaption id="caption-attachment-426658" class="wp-caption-text"> The current account has increased dramatically since the BOJ&#8217;s introduction of &#8220;Inter-Dimensional Easing&#8221; in April 2001, and the COVID-19 crisis further accelerated the increase (current account in gray, excess reserves in red). Data for excess reserves is from March &#8217;24, the same as the current method.</figcaption></figure>
<p> What is the problem with this interest? Every year, the BOJ pays &#8220;treasury dues&#8221; to the government. If the BOJ pays interest on the excess reserves, the amount paid to the treasury will be reduced by that amount. For the government, this means a decrease in revenue. In other words, interest on excess reserves is in effect a burden on the public.</p>
<p> Moreover, the banking industry is where the money that would normally be used as government revenue goes. As can be seen from the recently released financial results, the banking industry is doing very well at the moment.&#8217; In the fiscal year ended March 31, 2013, the three megabanks&#8217; combined net income was approximately 3.9 trillion yen, the highest for two consecutive years (three consecutive years if this fiscal year&#8217;s forecast is included). Regional banks also posted an overall net profit of about 1.3 trillion yen, with more than 80% of them reporting year-on-year increases (check their financial results, some banks have interest on excess reserves as the main source of income: &#8230;&#8230;).</p>
<p> (Check out the financial results of some of these banks and you will see that interest on excess reserves is the main source of their earnings ().) Why is it necessary for such an industry to pay back interest as if it were a &#8220;subsidy&#8221;?</p>
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<h3><span class="strongInContent"> The granting of interest is a measure to maintain the policy rate guidance target.</span></h3>
<p> Then, why does the BOJ charge interest on excess reserves?</p>
<p> Currently, the BOJ&#8217;s supplementary checking account system is not a unique rule. The U.S. central bank, the Federal Reserve Board (FRB), and the European Central Bank (ECB) also charge interest on reserve deposits.</p>
<p> There is a common reason. The central banks of Japan, the U.S., and Europe have implemented large-scale economic stimulus packages in response to the COVID-19 crisis that began in earnest in &#8217;20. They implemented &#8220;quantitative easing&#8221; policies to supply large amounts of funds to the financial markets, which resulted in a rapid increase in the balance of reserve deposits (the BOJ had been implementing quantitative easing policies even before the COVID-19 crisis).</p>
<p> What happens when monetary policy is tightened in this situation without interest on excess reserves?　Since it is useless for banks to keep reserves in current accounts, they try to invest them in the short-term money market in order to earn a little interest. This will result in a large inflow of funds into the short-term money market, putting downward pressure on short-term interest rates. This would reduce the effect of monetary tightening.</p>
<p> For example, in the case of the BOJ, the policy interest rate is the &#8220;unsecured overnight call rate,&#8221; which is a one-day interest rate with a guidance target of 0.5%. If a large amount of funds flow into the call market, the BOJ will not be able to maintain the 0.5% target under its normal monetary control (operations) &#8211; this is the logic.</p>
<p> If the excess reserves are kept at the same interest rate as the policy rate, the excess reserves will remain in current accounts, and banks will not have to invest them in the short-term money market. In other words, the interest rate, the interest rate of interest, also functions as the policy rate.</p>
<h3><span class="strongInContent"> How could negative growth cause concern about falling interest rates?</span></h3>
<p> That said, the drip-drip of subsidies to the banking industry will not be overlooked. It is difficult to assume that a major inconvenience will be caused immediately by the fact that the next-day unsecured call rate has fallen below the guidance target. In particular, it is expected to have the effect of restraining interest rate hikes, especially in the current situation where interest rates on government bonds in the ultra-long-term zone are rising.</p>
<p> The outlook for the Japanese economy is becoming quite uncertain.&#8217; Preliminary GDP data for the January-March quarter of 2013 showed negative growth for the first time in a year, at an annualized rate of -0.7% in real terms. Considering the impact of the Trump tariffs in the future, there is little reason to fear a decline in interest rates rather than a rise.</p>
<p> The Bank of Japan has also revised downward the real GDP growth rate for FY25 and FY26 in its &#8220;Outlook Report. A decline in interest rates without a change in the policy rate would be more favorable.</p>
<h3><span class="strongInContent"> Criticism of &#8220;excessive profit&#8221; by banks is growing in the U.S. and Europe&#8230;Raise the &#8220;deposit reserve ratio&#8221; to solve this problem</span></h3>
<p> In fact, the criticisms I have mentioned so far are already growing in Europe and the United States. And, in order to eliminate the &#8220;excessive profits&#8221; of the banks, an increase in the &#8220;deposit reserve ratio&#8221; has been specifically proposed.</p>
<p> Raising the reserve-deposit ratio means increasing the minimum amount required to be deposited with the central bank, thereby reducing the amount of excess reserves that are subject to interest. As a result, interest would also be reduced. In fact, in April 2012, the Swiss central bank raised the deposit reserve ratio in order to reduce interest payments, and a formal proposal has been made to the ECB.</p>
<p> If the elimination of interest on excess reserves is too much of a &#8220;tricyclic,&#8221; then at the very least, the BOJ should seriously consider raising the deposit reserve ratio. If left unchecked, the BOJ&#8217;s image of being &#8220;too favorable to banks&#8221; may take root. I would like to believe that this would not be the BOJ&#8217;s intention.</p>
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 After working as a money writer, financial planner, and market analyst for a securities company, Matsuoka became independent in 1996. Wrote articles on finance and asset management mainly for business and economic magazines. Author of "A Textbook for the First Year of Robo-Advisor Investing" and "Understanding with Rich Illustrations! Cashless Payments: The Book That Will Definitely Benefit You".

 Kenji Matsuoka

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 The banking industry is on a roll, as evidenced by the recently announced financial results. The three megabanks have posted the highest net income for three consecutive years. What is the interest on the BOJ's "excess reserves" that the BOJ is pumping back into the banking industry like a "subsidy"?

Almost a Waste of Taxpayer Money” – Why the BOJ is Still “Subsidizing” Banks Despite Megabanks’ Highest Profits

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