Abolish cash to end Japan’s deflation

Monetary medicine in Japan is keeping the economy alive, but with nasty side effects. The search for a new cure should begin with a simple question: What if the Bank of Japan were to throw out its money-printing presses?
Instead of pushing more yen into an economy that has already absorbed a threefold increase in cheap central-bank funds in five years without any sign of the much-awaited 2 percent inflation, maybe it’s time to abolish cash altogether.
While previous BOJ chiefs were rightly blamed for not acting aggressively enough to prevent the country’s slide into deflation, timidity is not a charge that can be levelled against Haruhiko Kuroda. Starting with his first policy meeting as governor in April 2013, Kuroda has expanded the central bank’s holdings of government bonds and bills to 48 percent of outstanding securities, from just 12 percent. He has also made the BOJ one of the top 10 shareholders in 40 percent of Japanese publicly traded companies, according to Travis Lundy, an analyst who publishes on Smartkarma.
Then, in early 2016, Kuroda embarked on an even bigger adventure to expunge the deflationary mindset of Japanese firms. Following the lead of Denmark, Sweden, Switzerland and the euro area, the BOJ embraced a policy of negative policy interest rates.
A year and a half of that experiment — not to mention more than 20 years of zero interest rates preceding it — has gone nowhere. Core inflation excluding fresh food came in at 0.8 percent in June. With the jobless rate standing at a 26-year low of 2.2 percent, as Bloomberg’s Japan economist Yuki Masujima notes, inflation should in theory be hurtling toward 1.5 percent.
Not only are prices off target, a side effect of negative interest rates is now obvious in worsening profitability of Japanese banks.
Japan is a highly cash-dependent society. The cashless payment rate is only 20 percent. What’s required is a public-sector push to replace all physical cash with a national digital currency. Sweden may stop using
cash by 2023. There’s no reason why technologically savvy Japan can’t get there even sooner.
Relentless pressure on Beijing from the Trump administration’s belligerent trade policies will push it to seek more influence in the region and beyond by stepping up belt-and-road financing. Now is not the time for Kuroda to walk away from the medicine chest, nor is it the time to persist with the current dosage – that would only weaken Japanese lenders to a point where they can’t compete against Chinese rivals for financing infrastructure projects.
So what if outlawing cash is still an experimental drug. It may be worth a try.

— Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News