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The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020

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  • Tsutomu Watanabe

    (Graduate School of Economics, University of Tokyo)

Abstract

This paper derives a money demand function that explicitly takes the costs of storing money into account. This function is then used to examine the consequences of the large-scale money injection conducted by the Bank of Japan since April 2013. The main findings are as follows. First, the opportunity cost of holding money calculated using 1-year government bond yields has been negative since the fourth quarter of 2014, and most recently (2020:Q2) was -0.2%. Second, the marginal cost of storing money, which was 0.3% in the most recent quarter, exceeds the marginal utility of money, which was 0.1%. Third, the optimum quantity of money, measured by the ratio of M1 to nominal GDP, is 1.2. In contrast, the actual money-income ratio in the most recent quarter was 1.8. The welfare loss relative to the maximum welfare obtained under the optimum quantity of money in the most recent quarter was 0.2% of nominal GDP. The findings imply that the Bank of Japan needs to reduce M1 by more than 30%, for example through measures that impose a penalty on holding money.

Suggested Citation

  • Tsutomu Watanabe, 2020. "The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020," CARF F-Series CARF-F-493, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf493
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    References listed on IDEAS

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    1. Tsutomu Watanabe & Tomoyoshi Yabu, 2019. "How Large is the Demand for Money at the ZLB? Evidence from Japan," Working Papers on Central Bank Communication 013, University of Tokyo, Graduate School of Economics.
    2. Tsutomu Watanabe & Tomoyoshi Yabu, 2023. "The demand for money at the zero interest rate bound," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 968-976, September.
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    Cited by:

    1. Mitsuhiro Fukao, 2021. "Comment on “The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 16(2), pages 245-246, July.
    2. Takatoshi Ito & Kazumasa Iwata & Colin McKenzie & Shujiro Urata, 2021. "The Post‐Abenomics Japanese Economy: Editors' Overview," Asian Economic Policy Review, Japan Center for Economic Research, vol. 16(2), pages 169-189, July.
    3. Takatoshi Ito, 2021. "An Assessment of Abenomics: Evolution and Achievements," Asian Economic Policy Review, Japan Center for Economic Research, vol. 16(2), pages 190-219, July.

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