About “Shikumi yokin” (Structured Deposits)

Many people know that there are different type of accounts and financial products in Japan.

• A “normal” account is an account you expect to take money out of and put money into on a daily basis. (This would often be called a “checking” account overseas, but checks were never popular in Japan).
• A “savings” account is an account where you plan to keep money for a long period of time without using it, and these often earn marginally more interest than a “normal” account. Technically, you can take money out of these accounts at any time.
• A “time deposit” is an account where you can put money for a fixed period of time, and you are not supposed to take it out. In exchange for “locking up” your money for a fixed period of time, you get a higher interest than normal accounts and savings accounts. This time period can vary between a month up to a year or more. The important thing is that you can cancel your time deposit and take your money our at any time, but you will lose the interest. These are similar to “Certificated of deposit” offered in other countries.
• Recently, “Structured Deposits” (仕組預金) have been promoted, which sound similar to “time deposits” – but they really aren’t. These products are what we are here to talk about today.

Basically the promotional materials say something like this “We’ll pay you 1% interest with a one year contract, and it can be extended for up to 15 years!”

To the lay person, this sounds great. If your normal bank account is paying 0.05% APR and a normal time deposit is only paying 0.6% APR, then a 1% APR sounds pretty good. 1% is still perhaps lower than you could get from the stock market or even precious metals, but the bank will tell you that it’s also risk free.

Of course, their definition of “risk free” is simply that you won’t lose the money you put in if you let the contract run to completion.

Why is this important? Well, let’s dig a bit more into the typical contract.

1. You deposit at least X yen for at least 1 year.
2. The bank will pay you 1% interest on this money.
3. The bank will decide whether or not to renew the contract at the end of the year. You have no say.
4. The bank can decide to renew the contract for up to 15 years. Again, you have no say in the matter.
5. As long as the bank renews, you may not cancel the contract or withdraw the money. The only exceptions are things like bankruptcy, legal judgement, etc., and even then the bank will charge hefty fees.

So in other words, however much money you put into the contract will be locked up for as long as the bank wants it to be, at their option, for up to 15 years.

Let’s consider three scenarios:

1. Interest rates remain the same.
   • The prevailing interest rates made this an attractive offer for you, so logic would dictate that if you entered into the contract in the first place, you would probably want to renew it.
   • Likewise, the bank would probably also want to renew it.
   • The bank renews the contract at the end of the 1 year term, and you can’t take out your money for at least another year – but at least you are getting the same 1% interest.
2. Interest rates go down
   • Interest rates in the market go down, so the 1% is looking even more attractive to you now – of course you probably want to renew.
   • From the bank’s point of view, this deal is looking less attractive, so they decide not to renew.
   • You get back your money at the end of the contract term, plus the 1% interest promised.
   • Now you need to find another place where you can park your money, but you probably won’t find a 1% deal since no bank will want to borrow money at 1% anymore.
3. Interest rates go up
   • Perhaps normal 1 year term deposits are now paying 2%. You would rather move your money into one of these to take advantage of the higher rates, so you don’t want to renew.
   • The bank would have to borrow at a higher rate now, but they have you locked in at only 1%. Of course they want to renew, and they do.
   • You are earning less than you could elsewhere, but you can’t take your money out. You have to watch while everyone around you earns 2%, and your money is stuck earning only 1%

Whether interest rates rise or fall, the bank has the advantage. It’s a “Heads I win, Tails you lose” scenario. Now imagine that rates continue to rise for 15 years and your contract is renewed by the bank year after year.

In this case, you will have twin disadvantages:

1. You can’t use your money for anything
2. You are earning less than you could be elsewhere

If interest rates rise to the point where the 1% would be a really good deal? Well, then of course they don’t renew and you are stuck with the same options everyone else has.

So this is a product that combines the disadvantages of a term deposit with the disadvantages of a normal account, with the added disadvantage that you can’t cancel the contract.

I would urge everyone to stay away from these kinds of products. While many financial products benefit both the bank and the consumer, these products are clearly designed to benefit the bank and only the bank.