Low Interest Rates Driving Households to Stash Cash

The amount of paper money and coins in circulation in Japan, the US and Europe has ballooned to nearly $4 trillion as households increasingly shun bank deposits that offer paltry interest rates.

More than 106 trillion yen ($958 billion) in Japanese bank notes was in circulation at the end of 2017, up 4% from a year earlier, Bank of Japan data shows. Meanwhile, coins grew 1% to nearly five trillion yen, Nikkei reported.

The 10,000-yen note, the highest denomination, accounted for 93% of the bills. This ratio has been climbing in recent years, which strongly suggests a rise in mattress-stuffing.

The same trend can be seen in the West. The US Federal Reserve reports $1.6 trillion cash in circulation at the end of 2017, a 7% increase from a year earlier. This also correlates with rising foreign demand for the greenback. Some €1.1 trillion ($1.34 trillion) were floating in November 2017, says the European Central Bank.

Interest rates remain low in these economies. Although cash affords the holders anonymity, those who maintain cash holdings risk opportunity costs when inflation and deposit rates rise. But monetary easing by central banks has driven down yields, prompting many people to stash cash.

  Scrutiny of Assets

Cash circulation in Japan stands in a class of its own. The rise in cash holdings has outpaced economic growth in Japan, the US and Europe. But Japan’s cash circulation equates to about 20% of the gross domestic product. The metric for the US and Europe hovers around 10%.

Many say the growing cash piles stem from Japanese tax regulators stepping up scrutiny of assets held by the rich.  

“None are looking to evade taxes, but many clients don’t wish for authorities to understand their assets in detail,” said a Tokyo tax accountant.

It also takes much time to determine the allocation of inheritance to heirs when a person dies suddenly. “Many people wish to set aside money that can be moved freely when the time comes,” said the accountant.

Many analysts predict that cash holdings will continue to increase in leading nations. But “the rate of growth could soften in places such as Europe that are turning toward monetary policy normalization,” said Osamu Tanaka, senior economist at the Dai-Ichi Life Research Institute.

Because the BoJ is expected to stick with its ultraloose monetary policy, Japan’s cash in circulation is likely to stand out even more compared with western economies.

In that event, the BoJ may not see much benefit if and when it unwinds the massive easing. When the central bank hiked rates in 2007, cash holdings ended up becoming more illiquid than anticipated, according to a senior BoJ official at the time. For an institution tasked with controlling the size of the monetary base, such a result would be frustrating.

There is also a growing international movement to retire bills with large denominations, which are often used for money laundering and other illicit purposes. Kenneth Rogoff, a professor at Harvard University, has called for Japan to get rid of the 10,000-yen note. In 2016, the ECB decided to phase out the €500 note.