Should Japan abolish currency?

by on June 20, 2009 at 7:50 am in Economics | Permalink

The idea is being discussed:

With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all – the abolition of cash.

Unorthodox, untried and, said one Bank of Tokyo Mitsubishi strategist, “in the realms of economic science fiction”, the recommendation has nevertheless begun floating around Tokyo’s corridors of power and economists have described Japan as particularly suitable as a testing ground.

One policy goal is to open up the option of negative nominal interest rates, perhaps as low as negative four percent.  It's worth noting that although you can buy swine placenta drink there, simply by swiping your cell phone, currency in circulation still amounts to 16 percent of gdp.

For the pointer I thank Pin-Quan Ng, a loyal MR reader,

1 John Thacker June 20, 2009 at 9:20 am

Yes, it’s worth noting that while cell phone transactions and smart cards (for trains and subways) are relatively common, credit card transactions for ordinary purchases are actually less common than in the US. Japan does use a lot of cash.

2 anon June 20, 2009 at 11:51 am

One policy goal is to open up the option of negative nominal interest rates, perhaps as low as negative four percent.

Isn’t this called demurrage? AIUI, this was implemented by many “private currency” systems during the Great Depression.

3 Jeff June 20, 2009 at 12:45 pm

One angle to consider: credit card firms charge a transaction fee (“factoring”) to sellers. This is typically 1-2% of the sale, although American Express is known to be much higher (I think over 3%). To avoid this cost, small businesses operate as cash-only (unlesss they anticipate or experience nonpayment volumes requiring collection assistance). This is why some companies — notably gas stations — charge a higher price for credit card purchases.

Abolishing cash necessarily inflates costs for all cash-only businesses (and has a smaller, but not negligible, effect upon remaining businesses). Factoring rates may also rise due to govt-imposed 100% demand, similar to the effects of mandatory car insurance, etc.

Can the inflationary effects of mandatory factoring be overcome by reducing other costs to those businesses (i.e., lowered taxes from closing the mint)?

4 patrick June 20, 2009 at 2:26 pm

Wouldn’t this just result in massive outflows of currency from Japan – resulting in even greater deflation?

Another possibility is people will just create a massive commodity bubble. Most commodities are worldwide now, so the Japanese could easily invest in gold, oil futures, etc.

This just sounds like trouble. Very interesting though… I hope they try it!

5 Nick June 20, 2009 at 3:00 pm

Negative interest rate is the same as devaluation of money in slow motion. Which can end up being a lot more troublesome than a quick devaluation. Because when people know ahead of time that their money is going to be devalued. Then everybody will try to get rid of their money as quickly as possible by converting it to other currencies or converting it to various non-productive assets, such as gold, land, and anything that holds value.

People will stop using the Japanese Yen and start using the US dollars or some other currency. And this will probably damage the Japanese economy a lot. Doing transactions in foreign currencies will be cumbersome and inconvenient.

People aren’t stupid. They will do whatever it takes to avoid being robbed by their government. And letting people know ahead of time that they are going to be robbed is a really stupid idea. Even the dumbest criminals try to avoid doing something like that. Because they know their victims will either hide their money or try to run away.

6 Bill Woolsey June 20, 2009 at 5:46 pm

I think it is pretty obvious that if Japan abolished currency, no one would hold Japanese currency. There wouldn’t be any to hold!

Now, would the Japanese hold any yen denominated checkable deposits if the nominal interest rate on them was negative? Almost certainly yes. Just less than they do when the yield is zero.

The purpose of making of the interest rate negative is to get people to spend the money.

If the yen depreciates relative to foreign currencies, (and getting Japanese to buy foreign securities would have the effect) then Japanese goods become cheaper to foreigners and foreign goods more expensive to he Japanese. Both should increase the demand for Japanese goods.

If find it remarkable that there are so many people with this intuition that if the interest rate is negative, the demand for money falls to zero, and hyperinflation results.

It is like the notion that if the price of gasoline rises, then people will just stop using gas (or, that it will have no effect at all.)

Anyway, increasing the demand for Japanese goods and services by Japanese, so Japanese firms sell more goods and services to Japanese, and so they produce more goods and services for Japanese, so they employ more Japanese labor and capital.. is the point. If they buy Japanese commodies, then, I guess, the Japanese will produce more commodities.

The nominal interest rate is about zero, and the demand for Japanese goods remains less than the capacity of Japanese labor and capital to produce goods and serivces. A lower nominal interst rate (slightly negative) should help relieve the problem.

But, everyone will just hoard currency (with its zero nominal yield) if the interest rate on bonds and deposits turn zero. Who will lend at a negative interest rate when the interest rate is negative and they can hold currency?

If there is no zero interest hand to hand currency, this is no longer a problem.

The notion that Japan will suddenly have hyperinflation is very implausible. Much more plausible is that spending will rise a small amount.

With Japan having slight deflation, a zero nominal interset rate is currently a positive real interest rate. A -1% nominal interest rate would be a zero real interest rate. Perhaps an even lower real interest rate (more negative) is necessary to balance saving and investment in Japan.

7 Doc Merlin June 21, 2009 at 7:00 pm

@Kohut … Agreed!

This will not work, long term savings will just move to gold or currencies that have interest rates. It would be amusing to see Japan move to a gold based economy. If this passes I am soooo buying gold EFTs!

8 Sbard June 22, 2009 at 1:26 pm

I honestly can’t see Japan abandoning its cash economy any time soon. When I studied there in 2004 I needed to pay my program fees in cash, I felt like a drug dealer carrying that much money in my wallet. The vending machines there will regularly accept, and make change for, 10000 yen (~$100ish) notes. The entire time I was there, I used my credit card a grand total of twice: once at an electronics store, and once to order something online.

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