Abstract
Modern monetary systems rely on two money creation channels: the issuance of new banknotes by the central bank and increases in loans by commercial banks financed by cash deposits. The latter are possible, because bank deposits that are meant as means of exchange by their holders are subject to very low minimum reserve requirements. For a long time, renowned economists have proposed to protect cash deposits fully by 100% reserve requirements, because depriving banks from creating new money would stabilise the financial system. The chapter argues that, under the prevailing fiscal and monetary conditions, Japan would greatly benefit from shifting to a 100% reserve-backed money regime. Such a move would not only take advantage of the benefits propagated by the supporters of a reserve-backed regime. The implied Bank of Japan’s (BoJ) balance sheet expansion would allow the Bank to purchase further Japanese Government Bonds (JGB). As the expansion would be permanent, the regime shift would not only stabilise the government’s fiscal condition, the BoJ, too, would no longer have to worry about exiting from its policy of quantitative easing. Both the government and the central bank could focus on their primary policy goals. The shift to a 100% regime would also very likely reduce Japan’s very high ratio of cash to GDP.
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Notes
- 1.
The monetary base comprises coins and banknotes in circulation plus current account balances at the Bank of Japan (www.boj.or.jp/en/statistics/outline/exp/exbase.htm).
- 2.
Money that commercial banks deposit with the central bank will be referred to as “bank reserves” or just “reserves”.
- 3.
Equivalent terms are “demand deposits”, “transferable deposits”, “cash deposits”, “transaction deposits” or “current accounts”.
- 4.
Ratios differ across types of institutions and types of deposits. For present requirements, see www.boj.or.jp/en/statistics/boj/other/reservereq/junbi.htm.
- 5.
IMF, Balance of Payments and International Investment Position Statistics, (data.imf.org).
- 6.
The primary balance describes the difference between revenues and expenditures net of debt services.
- 7.
For an up-to-date comparison of four major ratings, see http://www.tradingeconomics.com/country-list/rating.
- 8.
The terms are used interchangeably.
- 9.
It is not necessary for the accounts to be directly administered by the central bank as proposed by Huber and Robertson (2000, pp. 24–25).
- 10.
Friedman (1960) actually argues in favour of interest rates on bank reserves. If such rates are high enough and if competition among banks functions demand deposits will be free of charge and even earn some interest.
- 11.
It is interesting to note that economists of the University of Chicago that proposed the “Chicago Plan” in 1933 advocating a state monopoly otherwise strongly believed in the efficiency of markets (Phillips 2015, pos 1066-1068).
- 12.
Some proponents of FRBM suggest money supply to become a new source of government revenue (Huber and Robertson 2000, pp. 8–9; Jackson and Dyson 2012, Chap. 7). However, at the same time, they stress that monetary policy must be free from government intervention. It is questionable whether independence can be achieved with a fiscal transmission channel (Friedman 1960, p. 106).
- 13.
Of course, A and B could be identical. For example, if a firm directly purchases capital goods out of its cash or demand deposits. In that case, no additional credit or debt relation would be established.
- 14.
Table 6.3 underlines the size relations of the relevant assets and liabilities and the balance sheet effects of the transition. It does not depict the institutional implications, i.e., the fact that transferable deposits and reserves no longer represent assets and liabilities in the strict legal sense, but are only administered by banks.
- 15.
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Waldenberger, F. (2017). Fully Reserve-Backed Money: A Solution to Japan’s Fiscal and Monetary Challenges. In: Rövekamp, F., Bälz, M., Hilpert, H. (eds) Cash in East Asia. Financial and Monetary Policy Studies, vol 44. Springer, Cham. https://doi.org/10.1007/978-3-319-59846-8_6
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