Japan Moves to Use Dormant Bank Accounts for Socially Beneficial Activities

In December 2016, Japan’s National Diet passed the Dormant Deposit Utilization Act. While the act will promote the use of dormant bank accounts, this does not mean that the funds of depositors will be confiscated, as is widely misunderstood. Rather, its intent is to make socially beneficial use of dormant deposits. The act guarantees that those who do come forward to request repayment will have their deposits returned. Japan is currently burdened with social issues arising from an aging, dwindling population and public debts of more than ¥1,000 trillion. The act thus aims to use dormant deposits to promote initiatives that will transform Japan into a leader in solving those issues.

Dormant Deposits Growing by ¥100 Billion per Year

Dormant deposits are bank accounts that have been inactive for 10 or more years. Such accounts are growing by about ¥100 billion per year. If depositors request the repayment of funds in accounts that have been designated as dormant, banks must do so; about ¥40 billion to ¥50 billion is actually refunded each year.

The act opens a path for dormant deposits that are not refunded to be used for activities in the public interest. Such activities are those undertaken by private organizations with the aim of solving social issues that are difficult for central or local governments to address in view of the rapid economic and social changes ensuing from a population decline and aging. Specifically, the act envisions the following three activities.

1. Support for children and young adults
2. Support for people facing severe financial constraints
3. Support for the revitalization of local communities

Other activities may subsequently be added by a Cabinet Office order. While the three above areas may appear limited, “support for the revitalization of local communities” actually encompasses a wide range of activities.

Addressing Social Issues

The main aims of the Dormant Deposit Utilization Act include the following:

• Help build an environment conducive to the development of independent agents engaging in public interest activities and the raising of funds for such activities.
• Bearing in mind that funds to be used are private deposits, ensure impartiality and transparency in their use.
• Ensure that funded activities are not concentrated in large cities or in specific regions.
• Ensure that the creativity and ingenuity of private organizations are fully expressed by focusing on methods for effective use, such as supporting public interest activities over multiple years and establishing targets that will lead to the development of innovative methods for solving social issues.

These aims are designed to prevent funds from simply being used as subsidies. The focus on multiple years, development of innovative methods, and establishment of targets suggest a desire to effectively support entities that are truly laboring to solve social issues with new and innovative approaches. These entities are also expected to leverage the funds they receive to generate additional income from private sources, rather than becoming dependent on them.

The figure illustrates the framework for utilizing dormant deposits.

First, funds in dormant bank accounts will be transferred to the Deposit Insurance Corporation. A private foundation will be established as the designated utilization organization to which funds will be assigned. The basic plan for the management policies of the designated utilization organization will be specified by the prime minister. The designated utilization organization will select from a number of applying regional and community foundations across Japan with positive track records to serve as fund allocation organizations, which will provide grants, loans, and investments for projects being undertaken by local civic groups.

This framework has two important features.

First, the designated utilization organization does not directly fund projects. Rather, the framework seeks to make effective use of the funding functions of existing groups in the local community. There are three advantages to this approach.

1. Support can be directed toward groups that are better aligned with local conditions, avoiding the provision of funds to organizations without proven track records.
2. It can promote closer networking among companies, universities, and other stakeholders on a regional or theme-oriented basis.
3. Monitoring, assessment, and technical support can be performed at the local level.

Second, having the designated utilization organization supervise fund allocation organizations will provide a double set of checks and balances. If fund allocation organizations are not managed properly, they will disqualify themselves from receiving any future funding from the designated utilization organization. The check will work in a reverse direction as well.

Launch in 2019

The Dormant Deposit Utilization Act will take effect 18 months after its enactment, and it is assumed that the funding of actual projects will begin in the second half of 2019. Thus, there will be a need to formulate suitable detailed plans in the next two years.

Such plans will be examined by a deliberative council that will be established in the Cabinet Office. Already, a platform to consider the future framework for utilizing dormant deposits was established in February 2017 led by the private sector with the participation of a wide range of stakeholders. Discussions will take place in an open manner regarding approaches to ensuring transparency, suitable management methods, and the assessment of project results.

Three points will need to be considered in considering the future framework for utilizing dormant deposits.

1. Implement innovative solutions to social issues on a nationwide basis
   Funds should flow to innovative solutions, their results should be carefully assessed, and effective endeavors should be scaled up and implemented nationwide. This will require an accurate assessment of projects, strengthened support for the achievement of results, and effective methods for evaluating results.
2. Through the use of private deposits, attract the use of additional private-sector funds to address social issues
   Organizations should not become dependent on dormant deposits to finance their activities. The funds should be used to bolster the effectiveness of local groups and encourage private businesses to increase their contributions to society.
3. Ensure highly transparent management and accountability
   Organizations utilizing dormant deposits should be managed in a way to avoid conflicts of interest and inappropriate activities. There will, however, be no meaning in utilizing dormant deposits if this process becomes too rigid. What will be required is the thorough prevention of inappropriate use while maintaining a proper balance between a flexible approachw and sound management.

Learning from Other Countries

On a trip to South Korea to learn how dormant deposits are being utilized there, I was told by the heads of Korean foundations that solutions to social issues evolve and change with the times, that legally codified solutions soon grow outdated, and that a certain amount of flexibility is needed.

In that sense, Japan’s Dormant Deposit Utilization Act can be seen as a distinctive piece of legislation evolving out of the successes and failures of such forerunners as Britain and South Korea.

First, rather than prescribing everything in detail by law, which is difficult to revise once the law takes effect, utilization will take place by establishing a council and by having the prime minister specify a basic plan each year after reviewing council proposals and the current situation.

Second, utilization can take the form of either grants, loans, or investments.

Third, the designated utilization organization will not be a newly established independent administrative agency led by government and based on legislation as in the past. A foundation established by private-sector initiative will be designated.

The move to utilize dormant deposits has just begun. By pooling the knowledge and experience in the country and by leveraging dormant deposits to achieve a distinctively Japanese approach to social innovation, a social model may be created that will serve as a point of reference for other countries in Asia and elsewhere as they come to experience the demographic challenges now confronting Japan.