The 10,000 yen bill in your wallet is what the Bank of Japan owes.
Paper money that only the Bank of Japan is legally allowed to issue.
How Banks, Interest Rates, and Prices Work
Do banks lend out deposits?
Your pay has not changed, yet the same shopping as last year now adds up to a bigger receipt. When prices rise faster than the interest on the money in your account, what is happening? This course reads it through the links between banks, interest rates, prices and exchange rates.
Time to read the text: about 12 min
The review questions are optional and not included in this time.
What you can read: the course opening and contents are free; the full text is for those who have purchased
After purchase, you can read the full text once your access starts.
Banks, Interest Rates, and Prices in 3 Minutes
1See it
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The 10,000 yen in your account is what your bank owes you.
The face value is the same, but who owes the debt is different.
When a bank makes a loan, a deposit is written into the borrower's account.
Lending creates deposits, and repaying makes them disappear.
Even if a bank fails, for deposits that earn interest, your principal up to 10,000,000 yen and its interest are protected.
Per person, per financial institution. Settlement deposits are fully protected, foreign-currency deposits are not covered.
July 31, 2026
What the Bank of Japan mainly controls is the interest rate.
1.0%
The target for the interest rate at which banks lend to each other until the next business day.
When interest rates rise, interest increases for both borrowers and savers.
Borrowers pay more interest, and savers receive more interest.
End of March 2026
The biggest holder of the government's debt (government bonds) is the Bank of Japan.
42.2%
The percentage held by the Bank of Japan (at market value).
2025
Prices are 'the cost of a shopping basket.' They rose from the previous year.
3.2%
Japan's Consumer Price Index (All items).
10,000 yen into dollars. If 1 dollar is 80 yen, you get 125 dollars. If it's 125 yen, you get 80 dollars.
The smaller the number, the stronger the yen.
2In numbers
79%
The percentage of money in the UK that is bank deposits (2019, UK data).
125dollars
When you exchange 10,000 yen at a rate of 1 dollar = 80 yen. The dollars you get change with the rate.
3What would you do?
A 10,000 yen bill in your wallet and 10,000 yen in your bank account. Both are 10,000 yen. Are these two the same kind of money?
Pick one
Exactly the same money
The face value is the same. But the 10,000 yen bill in your wallet is what the Bank of Japan owes, while the 10,000 yen in your account is what your bank owes you. Who owes the debt is different.
Money where the debtor is different
That's right. The bill is a debt of the Bank of Japan, and the account balance is a debt of your bank. That's why there's a line of protection for deposits (for interest-bearing deposits, up to 10,000,000 yen in principal and its interest) in case a bank fails.
Whose debt is your balance? It all starts with distinguishing between your wallet and your bankbook by who owes the debt.
4Read more
Suppose a family takes out a mortgage at a bank to buy a house.
The moment the loan is made, a deposit equal to the amount borrowed is written into the family's account. The bank has not drawn down someone else's deposit to hand it over. A loan (the bank's asset) and a deposit (the bank's liability) come into being at the same time on the books. In a 2014 article, the Bank of England described the explanation that "banks collect deposits and lend them out" as a misconception.
Next, the family pays for the house with that deposit. The seller's account is often at a different bank. The deposit moves to the seller's bank, and the buyer's bank settles by handing over money held in its account at the central bank (reserves). If reserves flowed out with every loan, the bank would soon be unable to pay. So banks keep themselves funded by raising the interest rate on deposits to attract deposits, or by borrowing from other banks. That cost is weighed against the interest rate on loans, and both rates are influenced by the central bank's policy rate.
That lending creates deposits and that a bank can lend without limit are two different matters. The first is about the order of entries in the books; the second is about the constraints of payment and funding.
This course starts from this one mortgage and moves on to the money in your wallet and the money in your account, the line that protects deposits, the central bank's interest rate, government bonds, prices and exchange rates.
What you will understand after this course
- Be able to distinguish between the banknotes in one's wallet and one's account balance based on whose liability they represent.
- Be able to explain in one's own words the process by which bank lending creates deposits.
- Be able to state the central bank's targets for interest rates and prices as specific, time-bound figures.
More about this course
Course number: P4 — Do banks lend out deposits?
Supervised by: Mitsuru Hayama
Beyond the text: 6 exercises · 2 coins · 3 readings How reading times are calculated
You will also understand
- Be able to translate news of an "interest rate hike" or "weakening yen" into its impact on your own household finances.
You can start this course without reading any other course.
If you want to know more about checking sources (optional)
- Is It Really True? Checking History
We re-examine the origins of money and famous anecdotes, comparing them with historical records and actual artifacts.
Assessment
6 exercises in this course (4 check, 0 compare, 2 written). Progress is recorded by self-assessment.
The 8 chapters of this course
- Money in your wallet and money in your account — whose liability is it?Banknotes are a liability of the central bank; an account balance is a liability of a commercial bank. Even if the face value is the same, the counterparty is different.
- Do banks lend out deposits?Lending creates deposits. Payment moves deposits to other banks, and the bank keeps itself funded. In the end, it is the central bank's interest rate that counts.
- If a bank fails — The line that protects depositsDeposit insurance is established automatically. For interest-bearing deposits, the limit is 10 million yen in principal plus interest, per person, per financial institution (deposits for payment and settlement are fully protected, while foreign currency deposits are not covered). The level of the limit differs by country.
- What do central banks do? — They move interest ratesCentral banks move interest rates. The target is 2 percent inflation. Numbers come with dates.
- Government Bonds — The government's debt, whose asset is it?Government bonds are the government's debt and an asset for the holder. The largest holder is the Bank of Japan. Households hold them indirectly through deposits and insurance.
- Prices — Measuring the Cost of a BasketPrices are the cost of a basket. Figures should be accompanied by a time reference and base year. Your own basket is different from the average.
- Foreign Exchange and Daily Life — Reading the Strong/Weak Yen in Your WalletForeign exchange is an exchange ratio. 10,000 yen ÷ rate = dollars received. The smaller the number, the stronger the yen.
- Placing a line from the news within the frameworkWhich money, whose debt, the number's time point, where in my budget. Read a headline with these four questions.
Readings (3)
- The Panic of 1907 United States October 1907 New York, the counter of a trust company
Section 3. The Bank Run of 1907. From the perspective of the queue, deposits are the bank's debt. - A history of inflation Overview: the world the present day Vaccination
Section 4. The Volcker Interest Rate Hike. How a single number, the interest rate, affects both households and factories. - Famine and the smashing of houses Japan 1787 Edo and Osaka
Section 6. Rice for 100 Mon. The Edo-period concept of measuring prices by the basket.
Read next
Cash, Cards, and Digital Money →What you learn next: Be able to distinguish between cash in a wallet, bank deposits, cards, electronic money, and crypto-assets based on who holds the liability.
Time to read the text: about 10 min ／ What you can read: the course opening and contents are free; the full text is for those who have purchased
Price
After purchase, the full courses, the illustrated books, every country’s story and the numismatics examination are open to you.
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