Economist Warns Japan Rate Hike to 1% Could Trigger Major Financial Shifts

A leading Japanese economist predicts that raising interest rates to 1% could cause massive movement of household funds into bank deposits. This shift could make it harder for Japan's central bank to control monetary policy after decades of near-zero rates.

A prominent economist is warning that Japan’s anticipated interest rate increase to 1% could spark a major reshuffling of money that might make monetary policy more difficult to manage for the country’s central bank.

Japan’s central bank ended its decade-long massive economic stimulus program in 2024 and has increased rates multiple times, reaching 0.75% in December – the highest level in three decades. Financial markets expect another possible increase to 1.0% as early as March or April.

Ikuko Samikawa, the chief economist at Japan Center for Economic Research, explained that as Japan moves away from its extended period of zero interest rates, the country could witness massive fund movements as citizens transfer money into interest-earning bank accounts.

According to Samikawa, who serves on a finance ministry advisory panel and regularly participates in central bank discussions, historical patterns show households typically move cash into bank deposits when the policy rate climbs above 0.5%.

Such an increase in bank deposits would boost the total reserves that financial institutions maintain with Japan’s central bank, creating 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 explained.

She noted that the extended period of aggressive money printing has made it extremely difficult to forecast how funds might shift as interest rates climb.

Japan’s central bank is working to reduce its balance sheet, which expanded five times larger over the past twenty years to approximately 756 trillion yen ($4.88 trillion), primarily due to stimulus measures implemented in 2013.

Currently, financial institutions maintain reserves of about 454 trillion yen with the central bank.

Samikawa estimates the central bank could decrease this balance to around 280 trillion without causing short-term rates to spike, though she cautioned these figures could change based on future bank lending activity.