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Certain to cause confusion are the terms used in the media of "strenghthening" and "weakening" of currencies and the effect either has on the value of a foreign currency deposit.

Yen strength means that it takes fewer yen to buy the same amount of foreign currency than before. It means that things with a yen price will appear more expensive when looked at through another currency. It means that the value of a currency deposit in foreign currency goes down in value in yen terms.

The most difficult part is that the way currency rates are expressed confuses. If the dollar/yen rate moves 100 to 110, it is not the yen strengthening, but weakening. It costs now 10 more yen to buy one dollar. It is sort of counterintuitive as in most other assets the bigger the price is the more expensive it is.

Going back to our previous example with the yen strenghening over the year of the dollar deposit. So at the start (dollar/yen rates are 99-101) the 10100 yen buys 100 dollars and you still receive interest of 1.20 dollars (1.5% less 20% withholding tax). When you sell the market middle rate is 98 so the bank quotes 97-99, so you sell the 101.20 (100 plus 1.20 interest) dollars back to the bank and receive (97 times 101.20) 9816 yen, this time you would be down overall yen 284 or 2.8% from the money you started off with.

We undertook a quick review of the rates offered by some banks in Japan in several currencies to highlight the range available and show that it is worth shopping around. The review was done in April 2005 and is a small sample but proves a point.

On Australian dollars the rate at one "high street" bank was a "set up" cost, being the amount charged in the rate spread to buy and sell the currency for the deposit, of 5 yen on the rate of 82.5 yen. This equates to a 6.06% charge and on the deposit you receive 3.7% (2.96% after tax), so it would take just over two years to get any positive cash return, assuming the underlying market rate does not move. A more attractive rate was an internet bank which charged a 1 yen "set up cost" on 80.5 yen, so 1.24% as cost and offering 4.3% interest before tax.

For British pounds, the high street bank was charging 8 yen on 200 yen, being 4%, as a "set up" cost with interest for one year of 3% (2.4 % after tax), so it would take about one and a half years of interest to cover the cost. The interbank banks had more attractive offers with a 1 yen cost on 196.5 yen, so 0.5% cost with interest of 3.5% (2.8% after tax).

Interest income seekers should probably avoid the euro, one example was 3 yen on 140 yen being 2.14 %, as a "set up" cost, while interest for one year was 0.49% (0.392 % after tax). So the cost was equivalent to nearly five years` interest.

Interest rates on currencies are a "commodity" and the interest rate on british pounds is the interest rate on pounds and has a "market" price. As investors we can compare one bank to another provided we know the cost of entering into the deposit (see the other articles about exchange rates) and make our choice.

However we have to be able to ensure we are comparing the same thing and sometimes the way interest rate information in Japan is presented is not the most investor friendly.

Firstly, a look at typically rates from an internet bank in Japan for one year deposit in the following currencies (before tax and as of May 2005)
US Dollars 2.6%
Aust. Dollars 4.5%
British Pds 3.8%
So when you see an advert for 5 percent on a US dollars deposit, you should wonder how that can be. Usually on reading the small print you find that the rate applies to a limited period of the deposit only. In the case of the 5 percent one, on inspection it was clear this applied to only the first year of a three year deposit and that there was a separate formula to calculate the interest for the remaining two years.

Similarly a high street bank was offering its yen deposit of 1 percent in large print, which the small print shows applies for the first month and then the normal rate of 0.02 percent kicks in.

In reality any bank cannot be offering a real higher rate, unless they are a low cost "producer", which is why we like internet, you are taking more risk in some way. Otherwise there are terms in the small print which mean infact it is not quite as good as it seems.