Responses and Reforms to the Global Financial Crisis session at 12th International Conference

1. Rethinking the Concept of Credit
Creation and the Recent Policy of
the Bank of Japan
Akira Matsumoto
(Ritsumeikan University)
9/26/2014 PK conference 2014
Room302

2. Consequence of the Quantitative
Easing Policy by the Bank of Japan
• The Bank of Japan has adopted the QE Policy
like a super since 1999.
• This policy has been failed from the only view
of money supply and getting out of deflation.
• The point is why the base money supply of the
Bank of Japan hasn’t led to increasing of
money supply and anti-deflation(or reflation)

3. 1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Amount of Required Reserves Reserves
Excess Reserve
Amount of reserves (Average Outstanding/ Million

4. 60
50
40
30
20
10
0
-10
-20
-30
Base Money and Money Supply
(relative change from last year)
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
M2 BaseMoney
(%)

5. 115
110
105
100
95
90
Price Index 1998-2014 (2010=100)
CorpratePriceIndex CPI

6. Why Credit Creation?
• Is the Starting point of Money Supply the base
money (that is the central bank)?
• Is Money Supply the result of financial
intermediating process by base money supply?
• The Japanese experience since 1999 gives us the
above questions
• The Approach to the answer is how the credit
creation as the process of money supply should
be considered.

7. What does Bank do?
• Deposit is IOUs like a bank bill as everybody know.
• It circulate as a method of payment. Moreover any
cash doesn’t back them (or back a part of deposits).
• If IOUs without any backing can be accepted as a
means of payment, Banks don’t need to correct any
cash in order to make a loan. As deposits (or balance
of account) are means of payment, Borrowers don’t
need any cash in making the loan actually.
• We can reach to answer here. →To lend IOUs
without any backing is ‘Credit Creation’

8. Conditions to lend IOUs without
baking
(First)
• IOUs are debt. Therefore, as long as there is not
even a demand of the return, it continues to
circulate as means of payment. In the case of
bank if any transaction persist in clearing in their
account, deposit aren’t withdrawn as needed by
the depositor (that is, no demand of the
repayment). In their account, deposit as a debt
keep itself as a cash.
(a principal of the offset of debt and credit)

9. Conditions to lend IOUs without
baking
(Second)
• Deposit is born by a loan, and disappeared by the
return.
• As long as deposit is a capital for banks and social
reproductive process is subject to capital, deposit is
lent as capital. Therefore the return depend on a
back flow of capital. Investment is an advance of
capital, the collect of it is a back flow of capital.
• Capital should be lent in advance (investment) and
reflex to the start point (capitalist=investor).

10. Credit Creation is NOT a creation of
the existence from nothing
• The Process of the advance and flow back of
capital is the process of producing value by
labor working and realizing one.
• In this means, credit creation as lending
capital is a lending on expecting values which
will be produced in the future.
• Credit Creation is to make credit a interest-bearing
capital.

11. • RAse laonl ge acs ocrnedoitm cryea ationnd s hcorueldd taitk ec trhee afuttiuoren
value in advance, possibility and limitation of
credit creation depends on both capital flow back,
that is, a satisfactory movement of reproduction
and the offset of debt and credit.
• In this point the reproduction process of value
(the real economy) underlies the credit creation
• Therefore excess credit creation over needs of
the real economy strongly leads fictitious and
excess demands(a kind of bubble, this is not a
subject here).

12. Central bank and commercial bank
• As I mentioned above, by the credit creation
which is started by responding the demand for
fund of the real economy, commercial banks
are immediately faced with a withdrawal from
their account in cash or sending to other banks.
• At this time commercial bank need a final
means of settlement (a finality). That is the
reserve, that is the current deposit on the
central bank.
• The reserve is IOUs for the central bank.

13. The reserve resulted from credit
creation by the central bank
• Commercial Bank call for the reserve to the
central bank. The central bank should meet
this demand by banking services like as
commercial bank in credit creation.
• Trust of the central bank supports trusts of
commercial banks.
• In sum, the process of money supply is the
process which starts at lending of commercial
banks and completes at lending of the central
bank.

14. Base money supply is passive
• As the supply of reserves is banking service with
interest (the Bank Rate) for the central bank, the
reserve is a kind of cost for commercial banks.
Therefore they does never demand any reserves
at all, unless any necessities of fundraising occur.
That is, they don’t have any excess reserve.
Excess reserves is called “Buta-dumi” in Japanese
( a futile deposit).
• No demand of money in the real economy, no
supply of any base money

15. Unreasonableness Effort
by the Bank of Japan
• In order to keep the target of reserve
– The current account of the BoJ with interest
– No return operation of the long term government
bond
– To purchase the private asset (ex. ETF , J-REIT and
so on)
• Deterioration of the composition of its assets

16. Composition of BoJ Assets
（100million Yen）
1980 1990 2000 2005 2011 2014
# Gold Bullion 1,404 1,404 4,445 4,412 4,412 4,412
# Money 935 4,314 2,344 1,927 3,371 2,728
# bill bought 32,000 69,056 75,836 440,899 0 0
# Government Bond
158,351 315,421 562,943 989,175 1,050,687 2,082,258
- T-bill 116,309 225,410 160,953 51,306‒ -
Commercial Paper etc. ‒ ‒ ‒ ‒ 14,101 20,414
Corporate Debenture ‒ ‒ ‒ ‒ 28,925 33,618
Money trust(Stock) ‒ ‒ ‒ ‒ 14,100 13,515
Money Trust(ETFs) ‒ ‒ ‒ ‒ 14,382 29,566
Money Trust(J-REITs) ‒ ‒ ‒ ‒ 1,041 1,496
Discount bill 2269 1437 48 0 0
loan 21020 61595 6887 0 334,531 248,531
Deposit Insurance corporation(DIC) loan ‒ - 1339 0
# Foreign Exchange 21,893 29,960 36,856 47,278 48,366 54,224
# Agents balance 5 714 1445 107 407 76
# Repo security deposit - - 183777-
# others 2847 7663 12095 6716 4,434 5,476
Total(asset, liability and capita)
241,045 491,566 1,067,962
1,556,071
1,518,756 2,498,514
Changing of Asset Scale（Index, 1980＝100）
100 204 443 646 630 1037

17. Conclusion for now:
Dialectical process of nontraditional
monetary policy of the BoJ
• The direct purpose of a super and long term QE
policy of the BoJ has changed from increasing
money supply to keep the yield curve zero and flat.
• The BoJ has thrown its independence away and
gotten a financial institution for government
(irony of QE policy)
• what is the final point (an end) → Hyper inflation?