Any downsides to elderly Japanese keeping most funds in 10-year Japanese treasuries?

[hiscosmicgoldfish3]

I am a US citizen but my parents are elderly Japanese citizens living in Japan. From what I read, it seems for ultra low risk “investment”, it would be reasonable for funds unlikely to be needed for at least 1 year to be placed in something like 10-year Japanese treasuries. Assumptions/understanding:
- Banks/CDs basically provide minimal interest. Also has 10million yen deposit insurance limit per account.
- Japanese treasuries can be returned to the government after 1 year to get principal back, with a forfeiture of ~80% of one year’s interest
- Japanese treasury is at least as safe as deposit insurance

Is there anything major I’m missing? It seems unlike US treasuries, there is no risk of early redemptions losing principal value due to increase in interest rates?

Thanks in advance, and hopefully this is generic enough of a Q to be allowed in this sub.

 

[mellie]

@hiscosmicgoldfish3 At their age, the priority is on preservation, not growth. They don’t have enough time to meaningfully generate growth from higher yield investments without facing the risk of wanting or needing to access the money.

 

[hiscosmicgoldfish3]

@mellie Thank you, I appreciate the advice.

 

[phillev]

@hiscosmicgoldfish3 What would the purpose of buying Japanese treasuries be? If you're trying to grow the money, it won't help very much. The latest 10 year Japanese government bond is at 0.51% before tax, compared with 0.2% for a good bank account. The difference is not so large to be worth locking up your money.

Also, exactly how elderly are your parents? I would presume that the risk that they would need money suddenly is greater than any minuscule amount of extra interest that they would receive from having their money in JGBs rather than in cash.

Personally, I would keep all money liquid rather than invest in JGBs at an advanced age.

 

[hiscosmicgoldfish3]

@phillev Thanks, they are early 70s in good health. Do you have any good banks to recommend? They live a bit in the countryside so there aren’t that many banks in close proximity, and had had some difficult dealing with banks located only in the major cities online/over the phone.

The purpose would be to earn some interest while being able to withdraw after a year if needed. They get sufficient pension funds (including US social security) so that they are not needing to touch their funds at this point. My brother and I in the US would also be able to support them as needed as we have a fair amount of resources.

 

[dee436]

@hiscosmicgoldfish3 If you're looking for the best interest rates on JPY bank accounts, we have a section in our wiki: https://japanfinance.github.io/handling/banks/#interest-rate

 

[hiscosmicgoldfish3]

@dee436 Great, thank you. We will check it out for sure.

 

[phillev]

@hiscosmicgoldfish3 I see. It sounds like an online bank wouldn't be appropriate for them either, then. So, the situation is that they already have enough income from their pensions, as well as the potential support of their family. I'm going to double down and say they really don't need to be trying to increase the amount of money they have by investing either in bonds or otherwise locking up funds.

If it were me, I'd be thinking about how to either: spend it down to increase my quality of life, gift it to family members so that I can see them enjoy it while I'm alive rather than leave an inheritance, donate to a charity which I believe in, or otherwise make good use of the money rather than have it sitting around doing nothing or trying to increase it for no particular reason.

Perhaps this is not the answer that you're looking for, but it's what I'd do.

 

[hiscosmicgoldfish3]

@phillev Thanks for the thoughtful suggestions. You are spot on with our situation. I’ll try to convince them to just try to park their bank accounts in enough different banks to stay within insured thresholds. We are traveling and spending a lot of time together, though generally their kids (my brother and I) pay for everything so their balances don’t go down. Really appreciate the advice.

 

[ajaye2014]

@hiscosmicgoldfish3 SMBC is offering 5.1 % interest on US Dollar deposits in their banks in Japan. One year CDs.

 

[hiscosmicgoldfish3]

@ajaye2014 Thank you, they are going to look into seeing if they could have their US social security deposited directly into something like this. The main issue is they have no presence in their region and they would prefer to set accounts up in person.

 

[kristhuy]

@hiscosmicgoldfish3 If your parents' future expenses will be in JPY, investing in USD (even at 5% interest) is very risky. I would say it's even more risky than investing in something like the S&P500 or a global index fund. It's simply a bet that the exchange rate will not change by more than the difference between the interest rates, which is far from a safe bet.

 

[hiscosmicgoldfish3]

@kristhuy Yes, good point. They do come to the US often but the kids tend to cover all their expenses so their actual outlays in dollars is low.

 

[lishacccc]

@hiscosmicgoldfish3 Since you said in another comment that they don't expect to access the money, why not use at least some of it on a riskier investment? I'm not talking about naked call options or whatever, but a simple global equities fund like VT can generate a nice return that can go to spending later in life, charity, or bequests.

You said they're early 70s, Japanese, in good health, and they have enough money to fill the insurable portion of multiple bank accounts. The chance of at least one of them living another 20 years is much greater than zero, and one could expect the nominal value of that investment to roughly triple or quadruple in 20 years.

Yes of course there's risk, holding a cash cushion for a sudden medical issue is prudent, and making a splashy quality of life investment now could be sensible too. But if they're financially secure and enjoy their quality of life now, risk-tolerant medium- and long-term investing with some of their money is still prudent.

 

[phillev]

@lishacccc Strongly disagree with this. OP said that their parents are uncomfortable with online banks, and therefore they are also likely to be uncomfortable with self directed investments. This means they’ll very likely visit a salesperson at the local bank who will put them in the fund with the highest commission for themselves. This comes at the same time when most people’s mental acuity is on the decline.

And for what? So that they can quadruple their money in 20 years? It sounds good in theory, but the majority of people are way past their “healthy age” in their 70s and 80s. Even if they are alive, they are not really living in the same way as someone in their 50s and 60s are.

If OP’s purpose were to increase his parent’s nest egg as much as possible in order to maximize their own inheritance, that might also sound good in theory, but again with the time value of money, it would be better to gift the money to their children while they are still alive. By the way, I’m not at all implying that this is really OP’s intention. OP clearly is supporting their parents together with their sibling and seemed to approve of helping their parents enjoy their life in their other comment.

Money is a tool to improve your quality of life. Dying with millions is not success. It is a sign of a wasted life.

 

[paulcyp1]

@phillev Just to add to this. The OP mentioned that his parents receive enough for their daily needs without touching their cash deposits.

If they invest in 'global funds' as suggested elsewhere there is a good chance they will be down 20% plus in a relatively short-time. Stocks are high, the yen is low - not a good combination.

How do you think unsophisticated elderly investors will feel when suddenly their hard-earned 10 million yen is worth 8 million yen or less?

 

[hiscosmicgoldfish3]

@paulcyp1 Yes, while I am invested 90% in equities, I don’t anticipate touching those for 20+ years. The risk of currency shifts are too great for them to invest in global equities via yen.

 

[hiscosmicgoldfish3]

@phillev Thanks, my brother and I are trying to have our parents spend out their money while they are alive. The kids (us) are heavily invested in US equities, with appropriate fixed income exposure as well.

 

[myownmynativeland]

@lishacccc Agree with this. The life expectancy of an average Japanese women at 65 is 24.7 years (according to OECD data) so I would guess that a healthy Japanese women in their early 70s would be expected to live past 90 on average. With a 20 year time horizon and current living expenses covered by pensions, a substantial amount should be in equities and the rest in fixed income.