5 reasons why you shouldn't use foreign currency fixed term deposits in Japan
They come with quite a few gotchas to keep in mind
These days, it's very easy to come across ads for foreign currency fixed deposits (外貨定期預金 - gaika teiki yokin). The promises of 5% or even 10% annual interest rates are incredibly tempting and may lead people to question why they are saving money in yen in the first place.
However, these fixed deposits come with plenty of gotchas, and this post will lay out the main reasons why using them is usually not a good idea.
How they work
The system works in the following way: you make an agreement with your bank to exchange some of your yen into a foreign currency for a specific period of time, typically a few months or even a few years. During this time, the bank earns interest on your money, and a portion of that interest is shared with you. At the end of the agreed-upon term, the money is converted back into yen.
In the example image above, SBI Shinsei Bank offers options to hold your money for 3, 6, or 12 months, with an annual interest rate of 4.6% or 6% (minus taxes).
Why they are popular
Foreign currency fixed deposits are popular because people are interested in diversifying their currency holdings while simultaneously earning high interest on those holdings.
Japanese banks have abysmal yen currency interest rates, with the most common one being an annual 0.001%. With 10 million yen in your bank account, in one year you'd earn enough to buy a hot corn soup from the vending machine. Congrats!
In the US, rates of 5% or higher are currently available due to the current central bank interest rate policy (as of January 2024). That makes people in Japan wonder, "Why don't I get my hands on those good rates too?"
Reasons why you shouldn’t use term deposits
Reason 1: The exchange rate is very poor
The bank sets the exchange rate at which your cash is converted, and they do make sure to take a significant cut for themselves here, in both directions. It is important to keep in mind both the exchange fees as well as the actual rate being offered, as both can be used against you. You might be able to find banks offering reasonably low fees, but they would still be more expensive than using an FX account, for example, and the costs can accumulate rapidly when you transfer larger sums of money.
Reason 2: The interest rate is suboptimal
If a bank is offering you a fixed-term deposit with a yearly interest rate of 5%, it actually means that a yield of more than 5% was possible, but they take a portion for themselves. This process is not transparent, so it's difficult to know how much they are taking. However, a good approach for comparison would be to look at the swap point percentages being offered in an FX account, for example.
Reason 3: Your money is not insured
In Japan, the Financial Services Agency provides insurance for your money under the Deposit Insurance System, covering up to 10 million yen per bank account. However, when you transfer your funds into a fixed-term deposit, they are no longer protected by this system. Consequently, should the bank declare bankruptcy during this period, there is a risk that you may not recover your money.
Reason 4: Interest is locked at a determined rate
When you commit to a fixed-term deposit contract, you lock away your money for a specified period. This means you will not have access to it until the period ends. Additionally, the interest rate remains fixed during this time, so if interest rates increase, you will not benefit from the rise.
Of course, there's also the possibility of an interest rate drop, which would result in you earning an above-average interest rate until the end of your term. However, this scenario is less common, as banks typically perform extensive analysis before offering long-term fixed interest rate deposits.
Reason 5: Breaking contract has a penalty
If you do need to access your money before the end of the term, you have to break contract, a complicated process that usually also involves fees.
If you really want to do this…
If you really want to diversity your cash into other currencies while also enjoying good interest rates, a good alternative can be an FX account. They don’t suffer from any of the issues mentioned above: low or even zero exchange fees, insured accounts, and better interest rates (called swap points) that stay up to date. Finally, there is no time-based contracts so you can withdraw your yen at any time.
However, we are not endorsing FX accounts, especially not for anything other than medium or long term diversification. Currency day-trading is the most common activity performed on FX accounts, and we are not recommending that here.
You might not need any of this
While FX accounts are a reasonable option to diversity into other currencies while enjoying good interest rates, you might want to reconsider whether you need any of this at all.
There is no need to have cash in multiple currencies sitting in a bank account even if your goal is to diversity outside of the Japanese yen. Consider other non-cash assets such as index funds, stocks and bonds as a reasonable alternative that can be priced in a variety of currencies outside of the yen. For example, buying into a world index fund would enable you to diversity very broadly (since it holds a variety of stock market indices valued in their respective currencies). Of course, at the end of the day is has to be sold back into Japanese yen, but so does any of the alternatives discussed above too.
Conclusion
Hopefully this post has helped you understand the 外貨定期預金 products a bit better. The purpose of these products is always for the bank to make money, and this usually doesn’t align with the consumer’s best interest.
If you had thoughts, questions or disagreements with this post, I’d love to hear about you in the comment section below!