FX International Payments
By Phillip Silitschanu
The Bank of Japan has lowered its interest rate to 0.00 percent, which means that for most people or businesses holding Japanese Yen, it is actually cheaper for them to hold cash in their own home, or in a safe. In addition to a zero interest rate not increasing the value of their deposits, they also face bank fees which eat into their deposits.
In fact, the Japanese Finance Ministry has increased the number of ¥10,000 denomination bills being printed, from 1.05 billion bills to 1.23 billion bills – an increase of 180 million bills per year, since there is now such a sudden increase in demand for physical currency The amount of cash held at home is estimated to have increased to approximately ¥40 trillion in just the last year.1 Japan is not alone: in addition to Japan, five other countries’ central banks have introduced negative interest rates. Switzerland, for example, has effectively had a negative interest rate for decades: the ability for foreigners to keep their money deposited discreetly in Switzerland is attractive enough to outweigh the cost of keeping those deposits there.
Some countries also implement negative interest rates, in an effort to help spur a flagging economy: if it actually costs money to simply “park” money in a bank account, the logic goes, then most people would prefer to not deposit that money in a bank, but instead to hold that money as cash. And, it is generally human nature that when money is physically at hand, that cash is more readily spent. More accurately, when there is no financial benefit (or return) to be had by depositing (or holding) funds, then that money will be applied to ventures and investments that can yield a higher return. The act of spending money, instead of depositing it, is generally expected to help reinvigorate a slacking economy.
Normally, a positive interest rate means that when a depositor places their money into a bank, that money earns interest. For example, depositing US$100,000 in a bank account bearing 1 percent interest means that at the end of one year, the balance will be $101,000. In a country with a negative interest rate, for example a -1 percent rate, those same $100,000, after a year, would result in a balance of $99,000. In other words, a negative interest rate equates to effectively paying a fee to simply deposit one’s funds in an account. For this reason, in places like Japan, it makes more sense to hold one’s funds as physical cash, outside a bank account; or in the case of foreign businesses, to transfer those Japanese Yen as quickly as possible into another currency.
But what does this mean for foreigners, and notably businesses, that conduct business in Japan, and might not have a mattress in Japan under which to stash cash? It may become costly for a business to hold large amounts of Japanese Yen, in bank accounts in Japan when bank fees and 0 percent interest rates combine to result in declining balances. For example, if a business receives payment from a client for an order, in the amount of ¥10,000,000; if they decide to keep that payment sitting idle in their Japanese bank account, in as little time as a month it will be worth less than the original ¥10,000,000. Unless that business has a pressing need to keep their Japanese Yen parked in their local Japanese bank account, or expect to use that currency to pay a supplier or other obligation within a few weeks, businesses would often repatriate that currency back to their home country, or exchange it into another foreign currency—one which does not bear a negative interest rate.
The difficulty some businesses may face is how to transfer these funds from Japanese Yen into other currencies on a regular basis. For example, if a business has clients in Japan, and they are receiving local payments in Japanese Yen on a regular basis (weekly, every few weeks, or monthly), paying their bank to set up international bank wire transfers every week can quickly become costly. But, leaving those payments in the local Japanese bank account, sitting idly as Japanese Yen, losing value every day due to zero percent interest rates also becomes very costly. A third option would be to utilize an International wire transfer service. Such services offer fast and easy currency transfers, helping businesses transfer their funds from one country to another.
Phillip Silitschanu is the founder of Lightship Strategies Consulting LLC, and CustomWhitePapers.com. Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Long Only Strategies. He has also been quoted in the US Financial Times, The Wall Street Journal, Barron's, BusinessWeek, CNBC, and numerous other publications. Phillip holds a B.S. in finance from Boston University, a J.D. in law from Stetson University College of Law, and an M.B.A. from Babson College.
1.Japan to print additional ¥10,000 bills as more people stash their cash at home, The Japan Times, http://www.japantimes.co.jp/news/2016/04/07/business/japan-¥10000-note-output-1-23-billion-pare-smaller-bills-public-seen-stashing-cash-home/#.VzS7GHhcJUS;