Japan may see upheaval of funds when BOJ hikes rates to 1%, economist says

By Leika Kihara and Takahiko Wada

TOKYO, Feb 19 (Reuters) – An expected rise in Japan’s short-term interest rate to 1% may trigger a significant reallocation of cash into deposits that could ​complicate the Bank of Japan’s monetary policy implementation, a leading ‌economist told Reuters on Thursday.

The Bank of Japan exited a decade-long, massive stimulus in 2024 and raised the interest rate several times through December, when it hit a 30-year high of 0.75%. Markets are pricing in the chance of another hike ‌to ​1.0% as soon as in March or April.

Ikuko ⁠Samikawa, lead economist at ⁠think-tank Japan Center for Economic Research, said that as Japan emerges from a prolonged zero-rate environment, it could experience huge fund shifts as households move cash into interest-bearing bank accounts.

TRIGGER POINT?

Historically, when the BOJ’s ​policy rate has exceeded 0.5%, households have shifted cash into bank deposits, said Samikawa, a member of a finance ministry panel and ⁠frequent participant in BOJ forums.

An increase in ⁠bank deposits would lead to a higher overall balance ​that financial institutions hold with the BOJ, putting downward pressure on money ​market rates.

“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.

A ⁠prolonged era of heavy money printing has made it very hard to predict how funds could move as interest rates rise, she added.

The BOJ is ⁠shrinking its balance ‌sheet after it ballooned five-fold in the past two ⁠decades to around 756 trillion yen ($4.88 trillion) due ​largely to ‌the stimulus deployed in 2013.

The balance of reserves ​financial institutions ⁠hold with the BOJ currently stands at around 454 trillion yen.

The BOJ can reduce the balance to around 280 trillion without causing a spike in short-term rates, Samikawa said, adding though that the numbers may fluctuate depending on future increases in bank lending.

($1 = 154.8700 yen)

(Reporting by Leika Kihara, editing ​by Andrei Khalip)