To fight deflation, abolish cash. Could Japan make reality of ‘science fiction’?

[R.A. Hettinga]

At the heart of the problem of achieving negative nominal interest
rates is the idea that physical currency is an anonymous bearer bond
with a nominal interest rate of zero.


Remember my running gag about cash being a bearer-settled zero-coupon
zero-interest perpetuity?

They'll be taxing cash balances, if this keeps up...


Hat Tip:

<http://www.dshack.net/2009/06/could-japan-abolish-cash.html>

and

<http://www.cscoutjapan.com/en/index.php/e-money-in-japan-a-quick-video-overv
iew/
 >


Cheers,
RAH
--------

<http://business.timesonline.co.uk/tol/business/economics/article6531299.ece?
print=yes&randnum=1245843110986
 >



 From The Times
June 19, 2009

To fight deflation, abolish cash. Could Japan make reality of science
fiction?

Leo Lewis Asia Business Correspondent

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 Tokyos corridors of power and
economists have described Japan as particularly suitable as a testing
ground.

The search for more outri economic policies continues, despite the
recent surge in the Nikkei 225 index.The market may be reflecting
soaring Chinese investment, rising consumer confidence and other
cheerful data but economists see few long-term beacons of hope for
Japan.

Other extreme ideas mooted by the financial authorities include a tax
on physical currency or introducing one to operate alongside the yen.

All three ideas are based on a theory concerning interest rates and
the concept that a nominal rate of zero  as Japan has now lived with
for much of the past decade  may be too high. In Japans case, the
theory would suggest that nominal rates of -4 per cent might be closer
to what is required to rescue the economy from another deflationary
spiral. Having agreed that this might be necessary, the next question
is how it could be imposed.

Several MPs in the ruling Liberal Democratic Party believe the
abolition of cash, though politically radioactive, might be
technically feasible. Richard Jerram, a senior economist with
Macquarie bank, told investors that the proposal has become practical
with the broad penetration of electronic money and credit cards in
Japan.

He said that all the proposals were radical but worth consideration
for Japan. Without physical cash, a central bank can set rates exactly
where it likes, runs the argument. Mr Jerram said: At the heart of
the problem of achieving negative nominal interest rates is the idea
that physical currency is an anonymous bearer bond with a nominal
interest rate of zero. While a central bank can impose positive or
negative rates on non-physical assets, transmitting those rates to
physical currency is a huge challenge. By permanently removing cash
from a system, he added, policymakers are robbed of the excuse that
zero is the lowest that nominal rates can go as a deflation-fighting
tool.

In theory, many Japanese could easily make the leap into a cashless
world. The country has six main competing cashless payment systems,
many of them embedded into mobile phones. Including Oyster-type cards
issued by public transport companies, industry sources estimate that
there are about 120 million cashless payment chips sitting in Japans
wallets and handbags, waiting to be swiped.

Nevertheless, the country remains a wholeheartedly cash-based consumer
society. Currency in circulation is about 16 per cent of its GDP,
compared with the levels of 2 to 3 per cent in most developed
countries. Reducing that 16 per cent to zero would be a wrench but
would come with considerable benefits, Mr Jerram said.

But just as Japans cultural attachment to cash may prove hard to
dislodge, some economists believe that the same may be true of
deflation. The countrys growing population of elderly people mainly
hold cash or cash equivalents and, compared with its US and European
counterparts, the Bank of Japan has come under virtually no political
pressure to be more belligerent in its war on deflation. It is
unlikely, added Mr Jerram, to brook anything as radical as abolishing
cash.