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Background to the Recent Decline in the Growth Rate of Banknotes in Circulation

October 2004
Yoshihito Saito
Hideki Takada

This series explains recent economic and financial topics in a plain and concise manner for a wide range of readers. The views expressed in the report are those of the authors and do not necessarily reflect the views of the Bank of Japan.

Comments and questions as well as requests for hard copies should be addressed to Takeshi Kato, Monetary Affairs Department (takeshi.katou@boj.or.jp).

Click on rev04e03.pdf (150KB) to download the full text.

The year-on-year growth rate of banknotes in circulation surged during the period before the blanket deposit insurance was partially removed in April 2002, but became sluggish thereafter, and is recently at around 1 percent. Demand for banknotes is influenced mainly by transaction demand, the opportunity cost of holding them, the degree of financial system stability, and the cost of withdrawing and depositing them. The recent slowdown in the growth rate of banknotes in circulation is partly due to the fact that the effect of additional demand for banknotes stemming from the decrease in the opportunity cost of holding them has been subsiding during the prolonged period of extremely low interest rates, and partly because the financial system is regaining stability. Against this background, the growth rate of banknotes in circulation is likely to continue to follow a moderate downtrend.