News

A money trader works in front of the yen-dollar foreign exchange rate at a money market brokerage firm in Tokyo, Japan, Thursday, Aug. 4, 2011. (AP Photo/Shuji Kajiyama)

As the yen continues to surge against most foreign currencies, Japanese consumers are planning ahead by selling their yen for dollars -- and other currencies -- in hope of making a profit. Experts warn of risks, however, reminding the public of the possibilities that if the yen appreciates further, they will suffer losses.

According to the Bank of Japan, when the yen rocketed to a post-war high against the U.S. dollar at the end of March this year, the balance of foreign currency deposits exceeded 5 trillion yen for the first time. By the end of July it had increased by 7.7 percent compared to the same period last year, reaching approximately 5.1 trillion yen.

Since the yen went below 80 against the dollar in a historic record in August this year, inquiries by individual customers regarding foreign currency deposits have been on the rise, according to an official with SBI Sumishin Net Bank, a major Internet bank. According to their estimates, the bank's foreign currency deposit balance at the end of August increased by 80 percent on the figure a year earlier, reaching the equivalent of 108.5 billion yen.

Males in their 30s to 40s, who have a stable income and are generally interested in financial investments, are presumed to make up the majority of those who have invested in foreign currencies. According to SBI Sumishin Net Bank, many individuals have even opened new bank accounts solely for the purpose of foreign currency deposits.

From an investor's perspective, the idea is relatively simple -- and profitable. For example, if one dollar is sold at 75 yen, for 1 million yen one can purchase 13,333 dollars. When the yen eventually depreciates -- for example at 85 yen per dollar -- the investor will make a profit of 130,000 yen (excluding interest and commission) after exchanging their dollars.

Popular currencies among investors are U.S. dollars -- which account for almost half of total foreign currency deposits in Japan followed by the currencies of countries rich in natural resources, where interest rates are high, as well as those of emerging countries.

Individual investments in Australian dollars and South African rand have been recently increasing at faster paces than the U.S. dollar, with each having its yearly interest rate set at 1.7 percent and 2.6 percent (for ordinary deposits) respectively, far exceeding the dollar's yearly interest. According to SBI Sumishin Net Bank, its total amount of deposits in Australian dollars increased to become 2.3 times the figure a year earlier, reaching the equivalent of 30.3 billion yen, while the South African rand, which increased by 3.4 times, or 4.8 billion yen.

Euro coins are photographed in Frankfurt, Germany, Monday, Sept. 12, 2011. (AP Photo/Michael Probst)

Following Europe's debt crisis, the euro has been rather steady and holdings increased only by 10 percent, totaling the equivalent of 1.2 billion yen.

One of the main triggers behind foreign currency deposits lies in the availability of cheap commission rates through Internet banking. Whereas a customer would pay one yen of commission to normal banks for every exchanged U.S. dollar. Internet banking does the same for 0.25 yen -- four times less. The rate is even cheaper for exchanging the euro and Australian dollars.

Sony Bank and Rakuten Bank -- two of the leading Internet banks in Japan -- saw their foreign currency deposit balance in June increase by over 10 percent from the same month of last year. On the other hand, the three so-called 'megabanks' -- Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group -- had only a 2 percent increase over the same period.

But as more individuals are getting involved in currency trading, financial experts have quickly stepped in to warn about the possible risks. If the yen continues to surge, contrary to investors' hopes and expectations, it may result in a substantial loss of funds. Even more, as the circulation of the currencies of resources-rich countries, where interest rates are high, is rather low, the more investors buy them, the more intensified the risk of price fluctuation becomes.

It is also worth knowing that in the rare case that a financial institution goes bankrupt in Japan, yen deposits are covered by deposit insurance for up to 10 million yen plus accrued interest, whereas deposits made in foreign currencies are not covered and will not be compensated.