Foreign Currency Deposits Recommended by Banks: What You Should Know Before Starting｜きなこもち

Introduction

Many people have likely had the experience of being recommended foreign currency deposits at a bank counter with the pitch that “the interest rates are higher than yen deposits,” and feeling that it sounds like a good idea. In an environment of persistent low interest rates, it is a very natural reaction to want to try a method that might help your money grow even a little.

However, foreign currency deposits have different mechanisms and risks compared to yen deposits, and it is said that starting without fully understanding these details can lead to unexpected results. This article will outline the points you should check when you are recommended a foreign currency deposit.

Chapter 1: Why are foreign currency deposits recommended at bank counters?

Foreign currency deposits are often set with higher nominal interest rates than yen deposits. Major currencies like the US dollar, in particular, sometimes have higher policy interest rates than the Japanese yen, creating a structure where that interest rate differential is easily presented as an “attractive rate.”

On the other hand, it is said that for financial institutions, foreign currency deposits are also products that make it easy to generate revenue in the form of exchange fees (foreign exchange spreads). It is thought that this revenue structure is part of the reason why they are actively promoted at bank counters.

Of course, this does not mean that foreign currency deposits themselves are bad products. In fact, keeping assets in multiple currencies is considered to have a certain degree of rationality as a risk diversification strategy. However, there are several points that are easy to overlook if you focus only on the high interest rates.

Chapter 2: Two risks that are often overlooked

When considering foreign currency deposits, you should be particularly aware of two points: “exchange rate fluctuation risk” and the “fee structure.”

Exchange rate fluctuation risk

With foreign currency deposits, the amount converted into yen fluctuates depending on the difference in the exchange rate between the time of deposit and the time of withdrawal. It is said that there are cases where the impact of exchange rate fluctuations becomes greater than the profit earned from interest.

For example, even if the interest rate is 1% per year, if the exchange rate moves by several percent in the direction of a stronger yen during the deposit period, there is a non-zero possibility that the exchange loss will exceed the interest profit. It is considered important to imagine in advance how much of an impact there would be if the exchange rate moved in the opposite direction, rather than judging that it will “grow” just by looking at the high nominal interest rate.

Fee structure

It is common for foreign currency deposits to incur exchange fees both when depositing and withdrawing. The level of these fees varies significantly depending on the financial institution, and it is said that fees via over-the-counter transactions tend to be set higher compared to online banks.

Because round-trip fees are incurred, you should also be aware that using them in a way that involves repeating deposits and withdrawals over a short period could result in costs that exceed the interest earned. Judging only by the nominal interest rate could lead to overlooking the actual costs.

Chapter 3: Thinking in numbers: The relationship between interest rates, exchange rates, and fees

So far, we have organized the two risks of exchange rate fluctuations and fees. However, many people may find it difficult to grasp these concepts through words alone. Therefore, I would like to imagine the profit and loss from deposit to withdrawal by setting hypothetical conditions. Note that the following is purely a hypothetical assumption for explanation, and actual interest rates and fees vary depending on the financial institution and the timing.

Assumptions for the calculation (all hypothetical)

• The deposit amount is 1 million yen, and the period is 1 year.

• The exchange rate (mid-rate) at the time of deposit is 1 dollar = 150 yen, and the fee at the time of deposit is 1 yen each way (purchased at 1 dollar = 151 yen).

• 1 yen one-way when withdrawing (converting back to yen at a rate 1 yen cheaper than the mid-market rate)

• Assuming an annual interest rate of 3% and that interest is subject to approximately 20% tax

Calculating under these conditions, 1 million yen becomes approximately 6,620 dollars, and the interest after one year, after tax, is approximately 158 dollars. The total principal and interest is approximately 6,780 dollars. If the exchange rate remains unchanged, converting back to yen results in approximately 1.01 million yen, meaning the profit is limited to around 10,000 yen. Even if the nominal interest rate is 3%, once you subtract the round-trip fees and taxes, you can see that the profit remaining in your hands shrinks to about 1%.

Scenario if the exchange rate moves

Let’s look at what happens under the same conditions if only the exchange rate (mid-market rate) changes after one year.

• 1 dollar = 152 yen (a 2-yen move toward a weaker yen): Profit is approximately 24,000 yen

• 1 dollar = 150 yen (no change): Profit is approximately 10,000 yen

• 1 dollar = 149 yen (a 1-yen move toward a stronger yen): Profit is approximately 4,000 yen

• 1 dollar = 148 yen (a 2-yen move toward a stronger yen): A loss of approximately 3,000 yen, meaning the principal is eroded

With just a 2-yen move in the mid-market rate—a change of just over 1% toward a stronger yen—the interest for the year is wiped out, and you end up with less than your original principal. Of course, if the yen weakens, your profit increases, but even for professionals, it is considered difficult to consistently predict the direction of exchange rates. It is important to keep in mind that behind the “easy-to-understand number” of interest rates, exchange rates and fees can significantly influence the outcome.

Points often overlooked regarding the system

Unlike yen deposits, foreign currency deposits are not covered by the deposit insurance system. Additionally, interest is subject to tax, and it is said that foreign exchange gains may also be taxed as miscellaneous income. Since tax treatment varies depending on the situation, it is advisable to check with a tax office or a professional for details.

Chapter 4: A Checklist to Review Before You Start

When considering foreign currency deposits, reviewing the following points in advance may help you organize the information needed to make a decision.

1. Is your goal currency diversification or interest income?

The range of exchange rate fluctuations you can tolerate will likely change depending on whether your goal is diversification—wanting to hold a portion of your assets in foreign currency—or if you are simply attracted by the high interest rate.

2. The level of exchange fees (spreads)

Even for the same currency, fee structures vary by financial institution. It is worth comparing the conditions with other financial institutions rather than judging solely based on the terms recommended at the counter.

3. Target duration for the deposit

If you plan to withdraw in the short term, you are more likely to be strongly affected by exchange rate fluctuations. Conversely, if these are funds you do not plan to use for the time being, you may find it easier to take a long-term view, even if there are some fluctuations.

4. Is it separated from your living expenses?

If you allocate funds that you plan to use in the near future to a foreign currency deposit, you may find yourself in a situation where the exchange rate is unfavorable exactly when you need the money. It is considered advisable to think of these funds separately from your emergency savings.

5. Do you understand how it is handled after maturity?

Some products are set to automatically renew after reaching maturity. Since fees may be charged again at the exchange rate at that time upon renewal, it is reassuring to confirm the post-maturity handling before signing the contract.

6. Comparison with other options

There are other products with similar characteristics, such as foreign currency MMFs and foreign currency-denominated investment trusts that can be started with small amounts. It is one approach to broaden your options and compare them rather than focusing solely on foreign currency deposits.

Chapter 5: How to handle recommendations at the bank counter

When receiving an explanation at the counter, one option is to take the information home and consider it rather than making an immediate decision on the spot. Taking the time to judge for yourself after researching fees and exchange rate risks, rather than taking the representative’s explanation at face value, is by no means rude.

When asking questions, it might be helpful to confirm the following points specifically, rather than stopping at the phrase “the interest rate is high.”

• What are the exchange fees for both depositing and withdrawing?

• How much of an appreciation in the yen from the current rate would offset the interest earned?

• Is early withdrawal possible, and if so, what are the conditions?

• Will it be automatically renewed after maturity?

By confirming these specific figures, it is thought that it becomes easier to judge whether it fits your financial plan more concretely, rather than just having an impression that it “seems good.” If you find it difficult to decline on the spot, some people say they use phrases like, “I will consult with my family and contact you again.”

Chapter 6: How to compare with options other than foreign currency deposits

Foreign currency deposits are not the only way to address the feeling that “yen deposits alone are not enough.” Since each has its own characteristics, you may want to compare them according to your purpose.

Yen-denominated products (time deposits, government bonds for individuals, etc.)

Since you do not bear exchange rate risk with yen-denominated products, some view them as suitable for living expenses or funds you plan to use in the near future. While interest rate levels tend to be lower compared to foreign currencies, they are worth considering if you prioritize the stability of your principal.

Foreign currency-denominated MMFs, bonds, etc.

Foreign currency-denominated products handled by securities companies are said to have features such as lower fees or different yields compared to foreign currency deposits. However, since the mechanisms and risks differ for each product, it is necessary to fully confirm the details.

Foreign currency-denominated investment trusts

Some allow for diversified investment across multiple currencies and assets, and can often be started with small amounts. On the other hand, they incur management costs (such as trust fees), and the characteristics of their price movements are said to change depending on whether or not they have currency hedging.

In any case, comparing them from the two perspectives of “currency risk” and “costs” is considered to make it easier to see which options are right for you.

Chapter 7: Cases where foreign currency deposits might be suitable

On the other hand, there are cases where foreign currency deposits are easy to consider as an option. For example, if you have specific plans to use foreign currency in the future for overseas travel, study abroad, or shopping abroad, the purpose of taking on exchange rate risk changes from just seeking interest rates to securing foreign currency for actual demand, which changes the positioning.

Also, some people think of holding foreign currency as part of long-term currency diversification using a portion of their surplus funds that they do not plan to use for the time being, separate from their emergency savings. In this case, too, it is necessary to proceed with the premise of not being swayed by short-term exchange rate fluctuations.

Chapter 8: Frequently Asked Questions

Q1. Is there any point in starting with a small amount?

The ability to start with a small amount is considered one of the features of foreign currency deposits. There is also the idea of using the time when the amount is small to gain experience and get a feel for exchange rate movements and fees. However, since the percentage of fees does not change even with small amounts, checking the costs is essential.

Q2. When is the best time to exchange currency?

Since it is difficult to consistently predict the bottom or peak of exchange rates, it is said that there is a method of depositing at different times rather than all at once. This is one way of thinking to mitigate the impact of timing, but it does not guarantee an advantage.

Q3. What is the difference between a bank branch and an online bank?

In general, online banks tend to have lower currency exchange fees. On the other hand, bank branches offer the peace of mind of being able to consult with a representative while completing procedures. Suitability will depend on what you prioritize.

Summary

While foreign currency deposits have appeal in terms of interest rates, they are products that involve elements not found in yen deposits, namely exchange rate risk and fees. When recommended by a bank branch, it is considered important not to make a decision on the spot, but to consider them with the following perspectives in mind:

• Do not just look at the high interest rate, but try to visualize the actual profit or loss including exchange rate fluctuations and fees.

• Separate them from your living expenses and consider them only within the scope of your surplus funds.

• Compare them with other financial institutions and other products to confirm whether they match your purpose (diversification, interest rates, or actual demand).

Rather than signing a contract based solely on the impression that it “seems good,” having the attitude of understanding the mechanism and determining whether it fits your financial plan will likely lead to decisions with fewer regrets.

This article is for informational purposes only and does not recommend any specific financial products or investment actions. Please ensure that you make actual investment decisions based on your own situation and responsibility.