Cash Is King for Japan Households Due to Pessimism

Cash is king for Japanese households as pessimism about the economic outlook grows, threatening to undermine investment and the nation’s recovery.

Currency and deposits held by the country’s households last quarter increased to 806.5 trillion yen ($9.4 trillion) as of June 30, their highest level since quarterly data began in 1997, the Bank of Japan said in its flow of funds report in Tokyo today. Non-financial companies’ cash holdings were also near record levels, the report showed.

The data suggest that investors’ risk aversion may prevent demand inside Japan from picking up at a time when export growth decelerates in reaction to a strong yen and weaker overseas economies. The currency’s advance to a 15-year high against the dollar prompted Japan to intervene this week in the currency market for the first time in six years.

“The desire for safety is strengthening, as there’s just so much uncertainty in the outlook for the economy,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “This is one of the reasons stocks keep falling.”

Falling Shares

Total household assets came to 1,445 trillion yen, their lowest level in three quarters, weighed down by a decline in stocks during the period on concern the European debt crisis would cut short the global economic rebound. The Nikkei 225 Stock Average lost more than 15 percent last quarter, and has only climbed 2 percent since then even with corporate profits increasing.

Cash and deposits held by non-financial companies last quarter totaled 200.5 trillion yen, close to the previous period’s 203.9 trillion yen record, according to the report.

Japan’s export-fueled expansion may be losing steam. As export growth slowed to its slowest pace this year of 23.5 percent in July, the overall economy grew at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period. Households are becoming gloomier, with consumer confidence sliding to a four-month low in August.

At the same time, a recovery in corporate earnings encouraged firms to bolster investment in the second quarter.

In a sign that households and companies may prefer to put money where it can be retrieved right away rather than locked up to earn extra interest, cash parked in low-interest accounts is rising, according to the data.

Transferrable Deposits

Transferrable deposits increased 1.7 percent in the second quarter from a year earlier to the highest level since at least 1997.

“With interest rates falling like this, there’s little merit in putting money in savings accounts, and so people opt for liquidity,” Shinke added. “Obviously deflation plays a big factor in this as well,” because the purchasing power of the yen gains anyway with prices falling, he said.

The yield on Japan’s benchmark 10-year bond was at 1.06 percent as of 1:55 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield was at 1.32 percent at the start of the year.

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