No. 31 — August 11, 2000

 

Weekly Review

MATURING DEPOSITS REMAINING IN JAPAN'S POSTAL SAVINGS SYSTEM
--- by Arthur J. Alexander

Some ¥100 trillion ($909.1 billion at ¥110=$1.00) in guaranteed high-yield postal savings deposits — so-called teigaku accounts — will reach maturity in the 24 months that began this past April. In that month alone, the peak period for maturing accounts, an estimated ¥5.9 trillion ($53.6 billion) came up for grabs. The flow of money into and out of the postal savings system is important to Japan and, given its scale, to financial markets everywhere.

Interest rates on teigaku accounts are guaranteed for up to 10 years. After the first year, the rate rises every six months for three years according to a schedule fixed at the time of the deposit; then, it is constant until maturity. Withdrawals can be made without penalty at any time after the first six months.

Most of the huge volume of money in Japan's postal savings system is in teigaku accounts. Since 1980, their share of total postal savings deposits has been in the range of 85 percent to 90 percent. Although teigaku accounts up through the early 1990s paid 1 percentage point less than the interest rate on the longest-term time deposit then available at commercial banks, compounding over their longer rate-guaranteed period produced yields that approached those of bank instruments.

In April, as accounts set up in 1990 began to mature, the Japan Economic Institute published estimates of the volume of funds that might be withdrawn from the postal savings system (see JEI Report No. 15A, April 14, 2000). With the benefit of four months of information, a reexamination of these projections is appropriate. The speculation at the time was that depositors would have few reasons to transfer maturing funds into other investment vehicles since the postal savings system not only offers comparable returns but also greater safety than alternatives. Moreover, Japanese savers have shown little inclination to put their money into higher-return but riskier investments in amounts large enough to make a difference. Considerable movement into and out of various postal savings products was thought likely, but little net change was expected to occur in teigaku balances over a year or so.

This judgment was based partly on statistical regression analysis of several decades' worth of data. Of particular interest was how well the equations predicted outcomes in 1990 when large numbers of teigaku accounts also matured. As it turned out, the statistical estimates handled the earlier period quite well, especially after the dust had settled following the first six months of surging outflows and inflows.

The Postal Savings Bureau, which is part of the Ministry of Posts and Telecommunications, has established a goal of retaining 53 percent of the funds in teigaku accounts maturing between April 2000 and March 2002. However, except for direct redeposits, ascertaining the actual sources of money flows once funds have left the postal savings system is difficult. In the 1990 precursor to the present situation, funds seemed to have been withdrawn from teigaku accounts for a time, only to have returned by mid-1991. Some of this money was held in ordinary postal savings accounts and bank deposits, but a significant portion likely was placed under the proverbial mattress or in the tonsu chest.

Managers of the postal savings system can claim some success in meeting their current objective. Approximately 55 percent of maturing teigaku money has been rolled over. Moreover, in a development that might surprise everyone except readers of JEI Report, only a small fraction of all postal savings deposits has left the system.

Postal savings deposits peaked in February 2000 (see Table 1). Since the figures bounce around somewhat because of such onetime effects as bonus payments and holiday spending, seasonally adjusted data are reported also. According to the adjusted numbers, postal savings fell by roughly ¥1.7 trillion ($15.5 billion), or 0.6 percent of the total, between the high attained on this basis in March and July. This net outflow represented only about 10 percent of the maturing funds.

Table 1: Postal Savings Deposits,
1997-July 2000

(in trillions of yen)

End of Period

Postal Savings
(actual)

Postal Savings
(seasonally adjusted)

1997

¥237.78

¥237.05

1998

251.93

251.08

1999

259.55

258.69

January 2000

260.00

259.28

February 2000

260.59

259.70

March 2000

260.29

260.42

April 2000

259.65

259.40

May 2000

258.70

259.19

June 2000

259.60

258.95

July 2000

259.08

258.77

Source: Ministry of Posts and Telecommunications, Postal Savings Bureau

This simple approach to gauging net flows may be inadequate, however. Postal savings deposits have been rising for decades. Consequently, trends should be measured not from March's peak but against the growth that might have been expected to occur.

To make such projections, the equations used originally were reestimated with updated data. The monthly difference in seasonally adjusted postal savings deposits was the dependent variable. Independent variables included the differences and the lagged values of the following: the interest rate on teigaku accounts, the spread between teigaku and government bond rates, the spread between teigaku and savings rates at banks, disposable income, and a variable equal to 1 if government bond rates rose over the previous six months and 0 otherwise. This last variable was designed to capture market expectations of interest rate and asset-price movements. The new sample period extended from January 1988 through July 2000. The estimated postal savings balance was the result of adding the predicted monthly changes from the equation to the actual January 1988 value, the only anchor in the procedure.

The predictions still are on course (see Figure). A revealing shift took place in late 1997, when postal savings deposits jumped above their previous trajectory. This inflow of extra money was caused by the failures of several large Japanese financial institutions (see JEI Report No. 44B, November 21, 1997) and the ensuing anxieties, entirely justified, about the safety of commercial banks. More than ever, the government-backed postal savings system seemed to be a safe haven.

The two curves continued to diverge until late 1999. The fall in deposits this past spring brought the estimated and the actual values into almost perfect alignment. However, the equation did not anticipate this downturn, even though it did forecast a flattening rate of growth. One cause of the slowing of predicted deposit growth that was picked up was the 2.6 percent decline in seasonally adjusted disposable income in the first half of 2000.

One interpretation of these results is that postal savings deposits now are moving back to the trajectory that existed prior to the 1997 financial failures, facilitated perhaps by the volume of maturing accounts. If the 1990 experience is any guide, actual deposits are likely to fall below the predicted figure for several months and then resume the old relationship.

This scenario will hold unless a major shift in the business environment occurs that disrupts predictions based on the old relationship. One such obvious change is the deregulation of Japan's financial system that has taken place in the last several years. In particular, liberalized rules regarding the sale of mutual funds (called investment trusts) have created an attractive alternative for individual investors. Although not guaranteed, the rates of return earned by investment trusts are potentially far higher than the virtually zero yields now offered by the postal savings system or banks.

A pool of roughly ¥100 trillion ($909.1 billion) in maturing teigaku deposits is a mouth-watering target, one that has enticed the world's major money managers to set up shop in Tokyo or to offer their investment services through other channels. The obvious question is how successful have these "masters of the universe" been in attracting the savings of the Japanese, who are renowned, correctly, for their aversion to risk.

Table 2 shows investment trust assets by type of fund. Between yearend 1998 and December 31, 1999, stock funds doubled, increasing by more than ¥5 trillion ($45.5 billion). The "masters" outdid themselves by introducing 91 new funds in the first three months of this year compared with 33 in the same quarter of 1999 and 195 for all of last year. However, between March and the end of June — the period during which the bulk of the money in maturing teigaku accounts was up for grabs — the value of stock funds actually declined a bit.

Table 2: Assets of Investment Trusts by Type of Fund,
1997-June 2000

(in trillions of yen)

End of Period

Stock Funds

Bond Funds

Other

Total

1997

¥5.36

¥22.97

¥12.33

¥40.65

1998

5.09

21.75

15.90

42.74

1999

10.41

22.29

18.66

51.35

January 2000

10.46

24.54

20.51

55.52

February 2000

11.95

26.38

19.90

58.23

March 2000

11.85

26.40

16.62

54.87

April 2000

11.45

28.16

18.25

57.86

May 2000

10.92

30.61

17.09

58.62

June 2000

11.79

32.86

15.81

60.46

Source: Investment Trusts Association

In fact, though, most Japanese investment trusts invest in bonds, a less-risky option for a risk-averse population. The assets of bond funds jumped by more than ¥6 trillion ($54.5 billion) from the end of March through June, while the amount of money in investment trusts of all types soared by only slightly less.

Price changes could be masking the actual volume of money going into investment trusts, or at least into equity funds. After 1996, stock prices as measured by the Topix index of all shares traded on the first section of the Tokyo Stock Exchange fell 40 percent, rebounded 75 percent and then dropped 7.4 percent between February 2000 and midyear. Over the April-June period, the value of stocks funds would have increased by close to ¥1 trillion ($9.1 billion) had share prices not tumbled (see Table 3).

Table 3: Value of Shares Held by Investment Trusts,
Adjusted for Changes in Share Prices, 1997-June 2000

(in trillions of yen except Topix index)

End of Period

Stock Funds

Topix Index Tokyo Stock Exchange First Section

Stock Funds Indexed to March 31, 2000

1997

¥5.36

1,175

¥7.78

1998

5.09

1,087

8.00

1999

10.41

1,722

10.31

January 2000

10.46

1,708

10.45

February 2000

11.95

1,719

11.86

March 2000

11.85

1,706

11.85

April 2000

11.45

1,649

11.85

May 2000

10.92

1,523

12.23

June 2000

11.79

1,592

12.63

Sources: Investment Trusts Association and Tokyo Stock Exchange

The money moving into investment trusts was several times larger than the nearly ¥1.7 trillion ($15.5 billion) seasonally adjusted outflow from the postal savings system between the end of March and July 31. Of course, it is not possible to say whether funds actually went from the one place to the other. If the postal savings system indeed was the source of some of the money invested in stock investment trusts, investors took a hit. They would have been better off opting for the guaranteed 0.15 percent rate on one-year accounts or the 0.20 percent earned on deposits of three years or more rather than investing in stock mutual funds. Most likely, investors are moving funds from a variety of sources into investment trusts. Nonetheless, the postal savings system retains a good deal of its old attractions.

Japan's postal savings volume is so large that, in percentage terms, even small leakages from the system induce salivating at other financial institutions. However, it appears that most of the money deposited in postal savings accounts will stay where it is, at least for the present. That prognosis might change if higher expected returns on alternative investments could be combined with enough safety to attract the worried "salaryman." With the continued liberalization of the Tokyo financial market, the world might not have to wait too much longer for that to happen.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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