Despite 0% interest rates, Japanese people are still flocking to deposit money in banks.

Two of Japan's largest banks are now paying virtually no interest on customer deposits, Bloomberg reports.

According to the latest earnings report, the average interest rate that Mitsubishi UFJ and Mizuho paid to depositors fell to 0.00% for the first time in the nine months ending December last year, down from 0.03% in the same period the previous year.

The current reality is that banks in Japan are cutting interest rates to unprecedented levels to mitigate the negative impact on profit margins since the Bank of Japan (BoJ) adopted negative benchmark interest rates a year ago.

Japanese banks still attract many depositors even with zero interest rates. (Image: Internet)

The Bank of Japan (BoJ) uses interest rates below zero to combat deflationary pressures, encourage consumer spending, and urge businesses to borrow for investment. This is also seen as a way to control the appreciation of the Japanese yen – a problem that has often plagued Japanese exporters.

Mitsubishi UFJ and Mizuho said they have no plans to charge deposit fees to retail customers – a signal that these banks will continue to face pressure from declining profitability. A Mizuho spokesperson said interest rates will continue to fall and there is no indication that this trend will reverse.

Another major Japanese bank, Sumitomo Mitsui, offered a deposit interest rate of 0.01% for the nine months ending December 2016.

Despite ultra-low interest rates, deposits continue to rise at Japanese banks as companies and families choose to save money rather than invest or spend. This poses a challenge to Prime Minister Shinzo Abe's growth-boosting economic policy known as Abenomics.

In January, deposits in Japan's banking system increased by 4.5%, outpacing the 2.6% increase in loans, according to data released by the Bank of Japan (BoJ) this Wednesday. Deposits now exceed loans by 224 trillion yen, equivalent to $2 trillion, a record gap larger than Italy's gross domestic product (GDP).

"Savings continue to flow into banks despite low interest rates," commented Masahiko Sato, an analyst at SMBC Nikko Securities. "This shows they (the BoJ) have no way to stop this."

Mr. Sato also suggested that Japanese banks should step up the sale of investment products to improve profitability.

According to Diep Vu/vneconomy