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Rethinking the Concept of Credit 
Creation and the Recent Policy of 
the Bank of Japan 
Akira Matsumoto 
(Ritsumeikan Univ...
Consequence of the Quantitative 
Easing Policy by the Bank of Japan 
• The Bank of Japan has adopted the QE Policy 
like a...
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 
E...
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...
115 
110 
105 
100 
95 
90 
Price Index 1998-2014 (2010=100) 
CorpratePriceIndex CPI
Why Credit Creation? 
• Is the Starting point of Money Supply the base 
money (that is the central bank)? 
• Is Money Supp...
What does Bank do? 
• Deposit is IOUs like a bank bill as everybody know. 
• It circulate as a method of payment. Moreover...
Conditions to lend IOUs without 
baking 
(First) 
• IOUs are debt. Therefore, as long as there is not 
even a demand of th...
Conditions to lend IOUs without 
baking 
(Second) 
• Deposit is born by a loan, and disappeared by the 
return. 
• As long...
Credit Creation is NOT a creation of 
the existence from nothing 
• The Process of the advance and flow back of 
capital i...
• RAse laonl ge acs ocrnedoitm cryea ationnd s hcorueldd taitk ec trhee afuttiuoren 
value in advance, possibility and lim...
Central bank and commercial bank 
• As I mentioned above, by the credit creation 
which is started by responding the deman...
The reserve resulted from credit 
creation by the central bank 
• Commercial Bank call for the reserve to the 
central ban...
Base money supply is passive 
• As the supply of reserves is banking service with 
interest (the Bank Rate) for the centra...
Unreasonableness Effort 
by the Bank of Japan 
• In order to keep the target of reserve 
– The current account of the BoJ ...
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...
Conclusion for now: 
Dialectical process of nontraditional 
monetary policy of the BoJ 
• The direct purpose of a super an...
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Rethinking the Concept of Credit Creation and the Recent Policy of the Bank of Japan from Marxism Economics

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Rethinking the Concept of Credit Creation and the Recent Policy of the Bank of Japan from Marxism Economics

  1. 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. 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. 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. 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. 5. 115 110 105 100 95 90 Price Index 1998-2014 (2010=100) CorpratePriceIndex CPI
  6. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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?

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