Money for nothing

It is one of the mysteries of the world of personal finance. Money is so cheap in Japan that the central bank is virtually giving it away, but far from fuelling a massive house-buying and spending boom the average Japanese household is saving more than ever.

Take the Ezakis, a typical family of three, who are paying one of the cheapest mortgage rates in world history for their suburban home, but still feel that their personal finances are at risk of crumbling.

It is not that they are poor in terms of income or profligate spenders. Masaru, the sole breadwinner, is a 39-year-old section chief in the photocopy sales division of a large electronics company, who brings home slightly more than the Japanese average income of £22,000 a year.

As is the norm in Japan, his wife Yayoi controls the family purse-strings and the bank account into which Masaru's salary is deposited each month. All he sees of his earnings is the allowance of 40,000 yen (£240) that she gives him each month for lunch, cigarettes, football matches and the occasional after-hours beer with colleagues. Her own pocket money is half this amount, from which she buys gifts for their four-year-old daughter, Aya.

In 1994, the Ezakis bought their modest but modern two-bedroom flat in Urayasu, a suburb of high-rise apartment blocks built on land reclaimed from Tokyo Bay.

The flat cost a staggering 56m yen (£320,000), but thanks to the Bank of Japan's rate cut, they can easily afford monthly mortgage repayments of 110,000 yen (£628) that are about the same as the rent for an equivalent home.

One big difference with the British system is that they must also make two additional repayments of 600,000 yen (£3,400) per year when Masaru receives his summer and winter bonuses, each worth more than twice his basic monthly salary.

They borrow from Chiba Bank, a regional financial institution which recently cut its mortgage rates from 2.6% to 2.3% in response to the Bank of Japan's money-for-nothing policy. Last week, the central bank cut its official discount rate to just 0.1% - the lowest rate the world has ever seen.

This is great news for the Ezakis, who congratulate themselves on switching their mortgage from the fixed rates offered by the Housing Loan Corporation. Nine out of 10 of their neighbours did not make the same move and are now paying 5% per year to the semi-governmental body. With rates so low, Masaru and Yayoi feel less urgency about repaying their loan. They recently extended the period of their mortgage, originally arranged for 35 years, by an extra two years.

But even with the great deal they get on interest payments, they still often rue jumping into the property market, which has declined for 10 years in a row.

On average, land values in Japan have more than halved since the bursting of the asset-inflated bubble-economy in 1989. Masaru and Yayoi, who entered the market halfway through this decline, have not suffered quite as badly but their flat has lost about a third of its value, leaving them - low interest rates notwithstanding - in a negative equity trap.

The knowledge that their biggest investment is losing value every day has made Yayoi extremely cautious about spending on other objects. The Ezaki family have Visa, Access, American Express and JCB credit cards, which charge between 6% and 10% per year interest, but Yayoi says she always pays cash.

"It doesn't matter how low the interest rates are, I just don't trust myself with credit cards. It's a bad habit to get into. We only use them for my husband's business expenses."

But the family did splurge out recently on a new car, partly as a result of the rock-bottom cost of borrowing and partly, jokes Yayoi, because her husband cunningly tricked her into loosening the purse strings. "We agreed to buy camping equipment so that we could save money on family holidays, but after we had the tent and barbecue set, we realised that we didn't have enough space to carry it all in our old car so we went shopping for a new one."

The new Mazda people carrier cost 3m yen (£17,000), on which they took out a five-year loan at a 1% interest rate offered by Masaru's company as a perk for its managers.

Despite this one-off splurge, Yayoi says her aim is to save for an uncertain future.

"Zero interest rates don't encourage me, they worry me. It is another sign that something is wrong with Japan. Companies are restructuring, the national pension system is in trouble. We have to prepare for the worst."

But building up a nest-egg is not easy. The Ezakis put most of the family cash in Fuji Bank, which offers an interest rate of just 0.2% on its 10-year savings account. Even for those who are willing to tie up £50,000 for the next decade, the top rate in only 0.3%. "It's been like this for so long that I don't expect interest any more. The bank is just a secure place to keep money," says Yayoi.

Her retired parents, who live off their savings, are less blasé. They keep some of their assets in overseas dollar accounts, where the rate of return is much higher even though the currency exchange risks are greater.

Yayoi says it is not worth the gamble. Her best returns come on a 10-year life insurance policy at the post office. Although the official rate of interest on the policy is 5%, there are generous incentives for lump-sum payments and rewards of travel vouchers that, she says, can take the gains above 10% per year.

Not surprisingly, millions like her are opting for this form of investment, which is guaranteed by the government. Zero interest rates may not have sparked a spending frenzy, but they have made the savings and insurance holdings of Japan's post office bigger than any bank in the world.

But the Ezakis would not have it any other way. Although they would get a better return on their savings, an interest rate of 5% or more such as that paid by most British homeowners, has become unthinkable. "I don't know how they do it," says Yayoi. "If we had to pay 5% on our mortgage, it would be sayonara."