Daily Management Review

Bank of Japan is struggling to get rid of cash


11/08/2016


Cash war is gaining momentum, and of course Japanese experimentalists are pushing limits of possibilities. Having dived into the negative interest rates, Japanese politicians fully recognized that accumulation of cash cannot create inflation of 2%, and would not change "deflationary mindset".



japanexperterna.se
japanexperterna.se
Cash is still prevalent in Japan. Many places accept credit cards, Apple Pay has entered the local market, and other forms of cashless payment are also rather widespread, yet actual volume of banknotes and coins, circulating in Japan, has doubled during 20 years, Bloomberg writes. All this is happening despite the fact that the economy and the population declined.

At the end of October, volume of circulation cash amounted to more than 101 trillion yen ($ 966 billion). In 2014, cash was used for more than 80% of transactions in terms of value.

The problem with preference of banknotes and coins is that it limits options of the Bank of Japan’s policy. Propensity of Japanese to use of cash means that any attempt to further reduce the negative interest rates can cause people to withdraw their money from the banking system and keep them at home.

"Real" money has a much larger circulation in Japan than in other industrialized countries. America, for example, introduced plastic money largely due to the fact that carrying cash in a pocket was simply dangerous because of frequent street expropriations. In Japan, overall decency of the population and fantastically effective work of the police made such necessity simply meaningless. That is why vast majority of stores continue to operate in the old fashioned way - almost exclusively with cash. 

At the present time, essence of monetary policy of the Bank of Japan is not to prevent inflation, but to overcome negative consequences of deflation for the economy. Namely, we speak about braking consumer and investment demand. To hit the target, the government needs not to reduce, but increase amount of money in circulation. It is now growing more rapidly than GDP does, but the money are deposited in savings.

Meanwhile, Europe adopted a decision to stop production of banknotes in € 500. This is raising concerns that governments are trying to complicate use of cash and thus facilitate lower interest rates further into negative territory.

In Sweden, the vast majority of payments made without use of cash. Many bank branches do not accept cash deposits and do not produce cash advance. The country's central bank (Riksbank) said last year that negative rates are better in a cashless society.

The key interest rate of the Central Bank of Sweden is at minus 0.5% per annum. However, such a low rate is not appropriate for Japan, which is dominated by cash, says a former member of the Board of the Bank of Japan's Sayuri Shirai. The Bank of Japan may lower the rate to minus 0.2%, to a maximum of minus 0.3%, it said earlier this month. Current rate is minus 0.1%. 

source: bloomberg.com






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