What is the best way to diversify your assets in an economy with rock-bottom interest rates, faltering bank security and Friday’s termination of the government’s full guarantee on savings accounts?

One could stick with the tried and trusted domestic savings account, but an increasing number of people are hunting for products that offer higher returns with relatively low risk compared to the pathetic interest earned on most deposits at the nation’s struggling banks, experts say.

For instance, the 10-year Japanese government bonds exclusively issued for individual investors since 2003 have been quite popular, said Hideo Kumano, senior economist at Dai-ichi Life Research Institute Inc.

As of the end of December, the outstanding amount of JGBs held by households was 19.8 trillion yen, up 47.7 percent from a year earlier, according to the Bank of Japan.

“The safety of the investment and the level of return are extremely high,” Kumano said.

The principal is effectively guaranteed, while the floating interest rate on the bonds, which is reviewed twice a year, has been on an upward trend.

The rate on the first issues in 2003 was 0.09 percent. But it now stands at 0.73 percent, compared with the 0.15 percent interest offered on 10-year time deposits at major banks.

Also, if bond holders want to sell before the maturity date, the government will buy them back at preset prices any time from a year after purchase.

The buy-back scheme ensures that fluctuations in bond prices will not directly affect JGB investors, Kumano said.

For those who find bonds boring, mutual funds provide an attractive alternative for those ready to take on more risk.

Funds based on global sovereign bonds — the high-grade bonds issued by developed countries, governmental institutions and international organizations — have been drawing attention from individual investors lately.

As of the end of 2004, the total of mutual funds invested in stocks and foreign bonds rose by a net 9 trillion yen from a year earlier. Out of that increase, more than a half came from funds invested in foreign currency-denominated bonds, including global sovereign bonds, Kumano said.

For those willing to shoulder a bit more risk, there are mutual funds invested in bonds issued by emerging countries in Asia, Central and South America, and Eastern Europe. These have grown quite popular in recent years, according to Yasuhiro Hanamura, general manager at Morningstar Japan K.K.’s research department.

An upbeat outlook on the global economy and emerging countries’ rapid recovery from the Asian currency crisis in the late 1990s has whet investors’ interest, Hanamura said.

There is also notable demand for other funds linked to hedge funds, high-dividend companies and REITs — real estate investment trusts — which are based on the financial performance of office buildings and commercial facilities, he said.

The scheduled end of the government’s blanket guarantee on savings accounts and other bank deposits Friday has been a key factor behind the interest in diversification.

“The removal of the deposit guarantee is not necessarily the only factor, but it surely prompts people to shift money,” said Koichi Haji, chief economist at NLI Research Institute.

Yen deposits, however, are still popular with the public because accounts of up to 10 million yen per person per bank will continue to be guaranteed by the government. Banks are also starting new kinds of time deposits that offer higher interest.

Last April, Shinsei Bank launched a unique five-year time deposit called “Powered One” that gives the bank the option to extend the maturity for another three years, four business days before the original maturity date. Because of the option, the interest is 1.0 percent, or 10 times higher than the 0.1 percent interest offered on other banks’ five-year time deposits.

As of Dec. 31, the deposits had attracted more than 400 billion yen.

“People’s demand for yen-denominated deposits is still deep-rooted,” said Satoru Katayama, Shinsei’s managing executive officer and deputy head of the retail banking group. “Such safety-conscious customers prefer deposits at financially healthy banks, even if the return is slim.”

Backed on the strong demand, Shinsei earlier this month launched another type of time deposit called “PowerYokin,” which allows 24-hour access but puts higher security on withdrawals.

If the outstanding balance does not change for one year, the deposits bear 0.11 percent interest, compared with 0.03 percent interest on the one-year time deposits offered by major Japanese banks.

PowerYokin deposits are protected from card forgery or card thefts, because they allow customers to transfer money to and from savings deposits only when they visit the branches or phone the bank’s call center for authorization.

“Without education on how to invest in risk assets, the preference for yen deposits will not change easily,” Katayama said.

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