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Chapter 4 Currency and Flow of Funds
This chapter covers the stock and flow of money.
Definition of currency
Banknotes (Bank of Japan notes) and auxiliary coins are legal tender in compulsory circulation and are called "cash currency." They are used as the final means of payment. A large-scale transaction between corporations is settled by funds transferred between bank accounts based on the delivery of a check. The current deposits on which a check can be issued play the role of means of payment. Hence, they are generally called "deposit money." Demand deposits such as ordinary deposits and notice deposits that can be easily converted into cash currency are also treated as deposit money. The common definition of currency includes cash currency and deposit money.
On the other hand, a broad definition of money includes time deposits in addition to cash currency and deposit money.
Currency in circulation
Currency in circulation is the quantity of money in the market released by the Bank of Japan. It is the total quantity of banknotes issued and coins in circulation. As for the coins, the quantity held by the Bank of Japan is subtracted from the quantity of coins issued, thus being expressed as coins in circulation.
With respect to banknotes, the Bank of Japan releases information on the amount of banknotes issued by denomination at the end of each month and also the high of the month. As for coins, it releases the quantity of coins issued by denomination at the end of each month.
The Bank of Japan has been compiling the monetary survey since 1957 (for 1953) based on the monetary and financial statistics system determined by the International Monetary Fund (IMF). Various deposits excluding trust accounts in financial institutions are combined after having offset double accounts among financial institutions. Then, the items in the financial statements are combined, divided or adjusted, thereby obtaining the integrated balance sheet of the money supply side. The currency balance (liability) and the credit balance (asset) are juxtaposed. The financial institutions included in this calculation are the monetary authorities (Bank of Japan and Foreign Exchange Fund Special Account) and demand deposit banks (domestic banks, branches of foreign banks in Japan, credit associations, Central Cooperative Bank for Agriculture and Forestry, Central Bank for Commercial and Industrial Cooperatives and Central Credit Association).
Money-supply and related indicators
The Bank of Japan has been compiling statistics on the money supply since 1955. The statistics measure the quantity of currency of a nation (held by private non-financial sector) including deposit currency (or demand deposits), quasi-money (time deposits) and certificate of deposits (CD) as well as cash currency. It is closely related to the performance of the real economy and to the trend of prices, and considered to be a very important indicator of the economy. M2 + CD extensively cover the currency used in economic activities and have a high correlation with the real economy and price and also show a quick response, thereby being used as a representative indictor of the money supply. With the progression of financial liberalization, however, a shift of funds takes place between M2 + CD and the financial assets that are excluded from M2 + CD such as postal savings and money in trust. In addition, due in part to necessity for the total quantity including financial instruments with "liquidity," M3 and the broadly-defined liquidity have been compiled.
An increase or a decrease in the reserve deposits held by all financial institutions in the Bank of Japan occurs following the transfer of funds between a financial institution and other economic unit (an individual, a corporation, the State or the Bank of Japan). A "financial surplus" occurs when reserve deposits increase, a "financial deficit" occurs when reserve deposits decrease. Statistics on the financial demand-supply show, on the side of the Bank of Japan accounts, how the financial surplus/deficit caused by the issue or collection of bank notes or fiscal payments are finally adjusted by the Bank of Japan credits (loans, handling charges or selling/buying of FB).
Flow of funds accounts
The flow of funds accounts statistics comprehensively and systematically indicates the financial movements of the national economy and constitutes part of a system of national accounts.
The Bank of Japan has been releasing the FFA statistics since 1954 based on the international standards formulated by the United Nations Statistics Commission. In response to the 1993 revision of the UN standards, the Bank of Japan revised to the statistics after forty years and published the accounts retroactive to the end of FY1988. This revision made it possible to grasp derivatives and structured finance products as well as trends in financial institutions that do not take deposits such as pension fund and non-bank. In addition, it became possible to understand the relationship with the real economy such as GDP statistics more accurately.