Could Japan Abolish Cash?

I love the idea of a negative interest rate to fight deflation, and if there’s a country that has enough e-cash penetration and economic centralization to effect a change this huge, it’s probably Japan.

…a nominal rate of zero — as Japan has now lived with for much of the past decade — may be too high. In Japan’s 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.

(full article at The Times Online

The idea has a certain logic, but I’m not sold. Besides unleashing an untested idea on one of the world’s biggest economies, I find that outside big department stores and train stations, I still see a whole lot of cash changing hands (I’ve never once been to a dinner with friends and had someone pull out a card). The article says that about 16% of money in circulation is cash, but I’d bet that the percentage of physical transactions that happen in cash is a good deal higher.