Japan’s Bank is working in vain to reach their 2% inflation rate goal through monetary stimulus. There are, however, new ways to lift the economic constraints deflation caused. Soon, Japan could follow Sweeden’s lead by creating a cash-less economy to solve a few of their financial problems.
But How does this work? For five years, the Bank of Japan tripled its monetary base. It also implemented policies to reach an inflation-rate target by 2019 of 2%. There is one major problem with this goal. That is, the introduction of new money into the country hasn’t brought it close to any of their fiscal targets.
The new policies began under BOJ chief Haruhiko Kuroda who started his tenure in 2013. It was then he expanded the holdings of the central bank in both government bonds and bills that raised the BOJ’s holdings from 12 to 48 percent of outstanding securities. Kuroda also put the BOJ on the top 10 shareholders in 40 percent of publicly traded Japan companies. These unprecedented if not aggressive actions halted the country’s slide into deflation. The slow slide into deflation had begun many years before Kuroda was chief of the BOJ.
However, the increase of the ownership of the BOJ in outstanding securities, as well as publicly traded companies, did precious little to stop deflation. Therefore, Kuroda decided to adopt a policy of negative interest rates. Even though countries in Europe such as Sweeden, Switzerland, and Denmark saw positive effects from taking negative interest rates, the economy in Japan couldn’t seem to find any benefits from the policy change.
How A Cash-less Economy could Benefit Japan
Recently, Andy Mukherjee speculated the issuance of a national digital currency could be of value to Japan, in a Bloomberg Opinion piece. In the article, Mukherjee noted the side effects of negative interest rates could lead to another issue: surplus bank notes. Negative interest rate policies force banks and lenders to pay the bank interest on their excess funds. This, in turn, causes negative interest to pass onto depositors. Because it costs people to store money in bank accounts, cash is now the free, popular storage alternative.
Negative interest rates caused Japan to now become dependant on cash as a society with cashless payment rates at only 20%. Mukherjee believes that to save the monetary policy of the BOJ that’s damaged by cash-dependence, the government has to integrate digital alternatives forcibly.
According to Mukherjee, the BOJ would create a new electronic currency and give it to the government against a perpetual bond. The finance ministry would then sell that to the monetary authority. Then, the department would credit the electronic money to bank accounts across the country. Should the money be saved rather than spent, the value will decrease by about one-twelfth of one percent. Therefore, some of Japan’s money supply would be under negative interest rates. The higher spending would create inflation.
Japan Could Implement Cash-less Economy Before Sweden
In the end, this change could be successful and be a guiding light into a cash-free society. Sweden recently began making movements towards a cashless society as well. According to a recent study, the country is working towards removing cash transactions as early as 2023. Not only would this allow for greater control over the money supply, but the move to a digital economy is also more efficient for all involved. Cash can cause many problems such as secure storage and transportation. Digital transactions allow for governments to understand consumer spending better and enable lenders to add more tailored services for borrowers.