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Japan’s Cash Love Affair

In Japan, cash is truly king. Credit cards are regarded with suspicion; fat wallets are the norm. Banknotes are used even for big transactions. Yet even the Japanese were taken aback by this week's announcement of a massive bust by the tax authorities. Investigators arrested two sisters in the city of Osaka on charges of evading taxes by hoarding the equivalent of $56.4 million in cash.

Hatsue Shimizu, 64, and Yoshiko Ishii, 55, were said to have hidden the money away in Shimizu's garage. Last fall, when tax inspectors first raided the property, they were stunned to find stacks of cardboard boxes (50 in all) stuffed with yen banknotes. The stash is said to have weighed in at around 1,300 pounds. Many of the wads of bills still had the original bank bands around them; some were moldy with age. It took the tax bureau days to count out all of the money.

The two sisters had apparently siphoned off the cash in dribs and drabs from a larger sum ($72.5 million) that they inherited from their father, a real estate magnate, on his death in 2005. Apparently, the women were spooked when one of the banks that held their money went bankrupt a few years back. The reporters who descended on the house where the money had been kept were surprised to discover a modest two-story wooden dwelling with no visible signs of affluence. Neighbors interviewed by the hordes of journalists said that the elder sister had always been conspicuous for her modesty.

The same can't be said of the tax bill the two women will now be facing. Their inheritance should have been taxed at a whopping 50 percent, and the authorities say they can expect to fork out $28 million in back taxes. It's still unclear whether they will be fined as well. That would make this Japan's biggest inheritance-tax scandal ever. The previous record (held by the president of a taxi company who ended up owing the government $24 million) was set just two years back, suggesting that such cases might be growing more frequent.

Prohibitive inheritance-tax rates are certainly the main reason, but other factors might be at fault as well. In the late 1990s, widespread fears about bank stability thanks to a nationwide financial crisis triggered a rush to convert assets to tansu yokin ("drawer deposits").

The amount of cash in circulation has grown from 29 trillion yen in 1988 to 81 trillion in 2008. According to the Bank for International Settlements, that's a much higher ratio of cash to GDP than in any other developed country. As of 2003, Japan's ratio was 14.5 percent, compared to 6.1 percent in the United States and 3.3 percent in Britain. Of course, the continuing popularity of cash might well have something to do with the long years when Japan's interest rate hovered near zero. Not exactly the sort of conditions, in short, to make you run to the bank.

Unfortunately, as Japan's economy once again finds itself teetering on the brink of recession, possible motives for squirreling away cash aren't fading away. Last year it was revealed that the bureaucrats in charge of Japan's national social security system had misplaced or garbled millions of records on the contributions paid by citizens over the decades. Now countless pensioners are worrying that they may end up receiving next to nothing of the retirement funds to which they have a right. Against that backdrop, it's hard to blame ordinary Japanese for thinking that storing money under the futon looks like a much better bet.