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Japan may adjust its bank rates

Racked by deflation and eager to stave off a bank crisis, Japan is considering pushing its rock-bottom interest rates on some bank accounts into uncharted territory: below zero.

Lawmakers have suggested an exception to a law ending the government's guarantee on savings and other accounts that would allow the full guarantee to remain for no-interest settlement accounts that businesses use to pay their bills. Now, the government is considering allowing individuals to also have government guaranteed settlement accounts that would earn no interest, but these accounts would charge fees.

As part of his reform of the financial industry, Prime Minister Junichiro Koizumi wanted the government to protect savings of no more than ?10 million (US$83,132) for each account if a bank failed, a system similar to that of the Federal Deposit Insurance Corp in the US.

The more limited protection, which was already delayed a year, is scheduled to start next April. But lawmakers from Koizumi's own party, fearing that Japanese will abandon smaller, weaker banks and move their money to bigger banks that appear less likely to go under, are pushing for the loophole for businesses settlement accounts. Aware that such a provision might set off a rush by individuals to open such accounts, and to defray the costs of the guarantee, lawmakers returned to the drawing board.

All the maneuvering has already drawn some criticism. "We are disappointed with Prime Minister Koizumi's backtracking on his commitment to reform the banking system," said Marshall Gittler, a currency strategist at Bank of America in Tokyo. "We are disappointed that Japan once again has decided to reward incumbency and avoid a market solution to a problem."

But regulators say that keeping the government guarantee on the business settlement, or clearing, accounts is key to stabilizing the financial system. "We have to discuss how to protect the credit clearing function because it is part of the economy's infrastructure," said Shokichi Takagi, commissioner of the Financial Services Agency.

These clearing accounts pay no interest, but since companies use them to transfer payments to other businesses, not as investment vehicles, few complain. That Japanese people -- worried about losing their nest eggs -- would be willing to pay banks for the full protection of their assets is another reminder of how little faith they have in their financial system, and how a decade of deflation has eroded their confidence in other investments, like stocks.

While the proposal to protect these checking accounts would formally introduce negative interest rates, some Japanese have been paying to save for several years. Banks have been lowering the interest they pay since the Bank of Japan started cutting rates in 1991.
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