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Developments in Banknotes in Circulation since the Start of the Pandemic

December 10, 2021
YOSHIZAWA Kento, MAEHASHI Kohei, YANAGIHARA Hiroaki, KADOGAWA Yoichi
Monetary Affairs Department

INADA Masakazu
Currency Issue Department

In recent years, a phenomenon referred to as the "paradox of banknotes" has been observed worldwide: despite reduced opportunities to pay in cash due to the increase in cashless payments such as payment by credit card, the amount of banknotes in circulation has increased. Reasons that have been highlighted include the decline in the opportunity costs of holding cash amid the low interest rate environment as well as increased precautionary demand due to heightened economic uncertainty. Since the onset of the COVID-19 pandemic, this paradox has become more pronounced: cash in circulation has jumped even though opportunities to use cash have dropped sharply due to the economic downturn and the increase in e-commerce due to stay-at-home consumption. Our empirical analysis suggests that public health measures led to a significant increase in cash in circulation, with the effect being greatest immediately after the outbreak of pandemic and waning thereafter. It thus appears that developments in banknotes in circulation have been affected by precautionary demand for cash due to the heightened uncertainty brought about by the pandemic.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2021-E-6, is a translation of the original Japanese version, 2021-J-15, published in December 2021. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

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