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

Yoshihito Saito and Hideki Takada
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Yoshihito Saito: Bank of Japan
Hideki Takada: Bank of Japan

No 04-E-3, Bank of Japan Review Series from Bank of Japan

Abstract: 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.

Date: 2004-10
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