The upcoming removal of the government’s decade-long unlimited guarantee on bank deposits is not expected to drastically change the financial portfolio of the average household, said Paul Sheard, chief economist for Asia at Lehman Brothers.

Households will probably remain heavily dependent on cash and bank deposits because the government’s action is being taken for more symbolic reasons instead of strategic, he said.

On April 1, bank deposits of more than 10 million yen per person will not be guaranteed by the government, even if the bank goes under.

The move will effectively put an end to the 10-year-long emergency measure, which was aimed at soothing public fears about the health of the nation’s massively indebted financial institutions.

The guarantee was partially lifted in 2002 on time deposits and other types of accounts, but savings accounts were saved for last.

“This is not a regime shift, but a symbolic event,” Tokyo-based Sheard told The Japan Times in a recent interview.

It is symbolic because “it is tantamount to a declaration by the government that the banking system is now sound,” he said.

Sheard, 50, is one of the few prominent economists in Japan who has questioned the effectiveness of the deposit-guarantee system.

As April approaches, the government is campaigning hard to assure the public that its long-ailing banks are now healthy. But it is also trying to push the importance of diversifying investments ahead of the deadline.

The government’s policy partly comes from its desire to lure more of the public’s vast pool of savings, worth more than 1.40 quadrillion yen and mostly parked in bank deposits, to other investment tools, including stocks and real estate.

But the fundamental structure of the domestic equity market, in which foreign investors have been net buyers and domestic investors net sellers, has not changed, Sheard said. Foreign investors have been on a major buying spree in an effort to lift Tokyo’s stock market out of the doldrums.

In recent years, Japanese cash and bank deposits have accounted for between 50 percent and 60 percent of all household financial assets, compared with stocks, which count for around 10 percent, according to data from the Bank of Japan and Lehman Brothers.

Sheard said the end of the unlimited deposit guarantee will be accompanied by two loopholes that will mostly benefit large customers, such as companies.

One is that the government is continuing to fully guarantee “settlement accounts,” which were created solely for settlement purposes and pay no interest. According to financial experts, the accounts were introduced in anticipation of the end of unlimited protection, and Japan is the only industrialized nation that uses them.

The Financial Services Agency is focusing on protecting settlement accounts, saying any trouble in that system could seriously damage business activity.

Settlement accounts are mainly targeted at large-scale depositors, which include companies and local governments that need to keep everyday settlement transactions free of interruption. About 97 percent of Japanese banks have already introduced or plan to introduce this type of account, according to the FSA.

The other loophole, Sheard said, is that all deposits can be automatically guaranteed if the government decides to invoke the Financial System Management framework.

Under the framework, set up by the Deposit Insurance Law in 2001, the prime minister can order deposits at a financial institution to be fully protected — if it is deemed the institution’s failure will seriously harm financial stability in a certain region. The first time the framework was invoked was during the Resona Bank bailout in 2003.

“In a normal economy, large-lot depositors — corporations and generally wealthy individuals — should be supplying risk money to the financial system. Somebody has to bear risk in any financial system,” Sheard said.

“Most systems have mechanisms to protect small depositors, but not necessarily large depositors,” Sheard said, “particularly in Japan, where there is a huge amount of money held in the banking system by the household sector and the corporate sector.”

Sheard said what the Japanese government has to do to prompt households to allocate more money to risk assets is to get the economy out of its prolonged deflationary state and put it on a sustainable growth path, which will eventually lead to positive interest rates.

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