P11　Putting a price on time

Lending/Interest/Interest prohibition and its circumvention → Commercial credit/Government bond yields/Interest rate markets/Policy rates/Yield curve

Is ten thousand yen today worth the same as ten thousand yen a year from now?

Interest rate

Four Steps

These are the four steps for going beyond "it's similar." The "limitations" step defines the point beyond which historical analogies should not be drawn.

Read at the Modern Money Stations

Stations from the textbook "Modern Money: Whose Debt Is It?" where this structure appears. The four steps for each station are not displayed on the screen in the textbook. Here, you can read them side by side.

Where do banks borrow to cover shortfalls?

2-06 / Banks　Present. Tokyo. Call market.

Similarities

Short-term lending among merchants has existed since the periodic fairs of the Middle Ages. The demand for credit fluctuates on a daily basis.

Differences

What is lent and borrowed is not gold coins but balances in Bank of Japan current accounts, and the total amount only changes with the actions of the central bank and the government.

Applications

When you hear "interest rates have risen," distinguish which market, for what period, whether it's the uncollateralized overnight call rate or long-term interest rates.

Limitations

The explanation of the call market is for Japan; the system differs from the Federal Funds market in the United States or the mechanisms in Europe.

Interest is paid on excess reserves.

2-07 / Banks　2008–2024. Tokyo. Complementary Deposit Facility.

Similarities

Money changers charged fees or paid interest on money they held in deposit. The principle that the amount deposited changes based on the depositor's profit or loss remains the same.

Differences

Today, central banks create a floor and a ceiling for short-term interest rates across the market by setting the interest rate on their own liabilities.

Applications

When you hear "negative interest rates," verify to which balances they applied and at what rate. Not all deposits were subject to negative rates.

Limitations

The amounts for the breakdown of the tiers (Basic Balance, Macro Add-on Balance, Policy-Rate Balance) are not covered in this stop.

What is Monetary Policy Meant to Influence?

3-01 / Central Banks　Present. Tokyo. Bank of Japan Act, Article 2.

Similarities

The idea that the state is responsible for maintaining the value of currency follows the same lineage as ancient edicts that forbade recoinage.

Differences

In ancient times, the responsibility was to protect the weight and purity of the coinage. Today, the responsibility is to stabilize the overall movement of prices measured by currency, expanding the focus from the currency itself to the price system.

Applications

When you hear "monetary policy," analyze it in three parts: what is being targeted, by what indicator, and to what level.

Limitations

The 2% target was a decision made in Japan in 2013 and should be considered separately from the targets of other countries or Japan's previous approaches.

The Operational Target Has Changed Many Times

3-04 / Central Banks　1994–2024. Tokyo.

Similarities

Just as the means of recoinage shifted from gold content to the stamped face value, policy tools also change with the times.

Differences

All modern tools are either items on the central bank's books or market interest rates; they do not involve the physical material of the currency itself.

Applications

When reading articles on policy, first check what the operational target was for that year. The meaning changes depending on whether it is about interest rates or quantities.

Limitations

The numerical targets for each period will be covered in the next three stops. Here, we only trace the changes in the tools used.

Zero Interest Rate and the First Quantitative Easing

3-05 / Central Banks　1999–2006. Tokyo.

Similarities

The decision to switch from a tool that has reached its limit to another is similar in form to the historical shift to different materials or banknotes when raw materials became scarce.

Differences

The difference is that the new tool is not metal or paper, but a number on the books: the balance of the central bank's liabilities.

Applications

When you hear "quantitative easing," distinguish by year whether the target was the current account balance or the monetary base.

Limitations

The target for the current account balance is based on the values in the policy statements of March 2001 and January 2004; the history of increases in between is not covered.

Negative Interest Rate and Yield Curve Control

3-07 / Central Banks　2016. Tokyo.

Similarities

A money changer charging a custody fee and a central bank imposing a negative interest rate. The principle that the balance moves based on the depositor's profit or loss is the same.

Differences

The rate is imposed on the entire market's reserves, and the objective is not individual profit but guiding short-term interest rates. Manipulating long-term interest rates was something no one in the Middle Ages could do.

Applications

Read "negative interest rate" and "long-term interest rate at around zero percent" separately, considering their target and duration.

Limitations

The amounts of each of the three-tier balances and the evaluation of side effects are not covered.

March 2024 — Review of the Framework

3-08 / Central Banks　March 19, 2024. Tokyo. Monetary Policy Meeting.

Similarities

The decision to end the large-scale easing framework follows a lineage of "milestones" like the postwar currency reforms.

Differences

Even after the milestone, the balance sheet remains. Unlike the recoinage of gold coins, liabilities do not disappear from the books.

Applications

When analyzing a policy shift, read the main text of the decision (policy, interest on deposits, purchases) separately from the economic assessment in the annex.

Limitations

This stop is based solely on the main text of the decision. Subsequent decisions on interest rate hikes or reductions in purchases will be covered in another stop.

The repo rate becomes the benchmark for contracts.

5-04 / Repo and Collateral　Present New York

Similarities

The idea of creating a "benchmark interest rate" from market transactions is the same as setting exchange rate quotes or determining prices at a commodity exchange.

Differences

The basis for the benchmark is not the submissions of specific banks, but the median of actual transactions collateralized by government bonds.

Applications

When you see a "SOFR-linked" contract, remember that its interest rate comes from the overnight government bond repo market.

Limitations

The calculation of Japanese yen interest rate benchmarks (such as TONA) and the Tokyo Repo Rate is not covered in this station.

Floor and Ceiling — How the central bank corridors interest rates

5-06 / Repo and Collateral　Present New York, Tokyo

Similarities

Ancient laws that set a ceiling on interest and standing lending facilities that create an interest rate ceiling are the same in that they frame interest rates.

Differences

What creates the frame is not a legal prohibition but the option to transact with the central bank. Arbitrage by market participants makes the frame effective.

Applications

When looking at the policy rate, check the floor (interest on reserves, reverse repo) and the ceiling (lending facility), and see where the effective rate lies.

Limitations

The eligible counterparties and actual interest rate levels for each facility change daily. The Eurozone's system is not covered.

How QE works — what happens when bonds are bought?

7-04 / 2008 and QE　2009–, London

Similarities

The operation of a state supporting bond prices to lower yields is similar in form to the history of supporting government bond prices during wartime.

Differences

The consideration is central bank reserves, and the goal is the interest rate of the entire economy via government bond yields. It is a monetary, not fiscal, operation.

Applications

When you hear "QE," track from whom, what, and with which liability it was bought, and then which asset prices moved.

Limitations

The Bank of England's explanation is based on the UK's system and experience. The evaluation of the magnitude of the effects relies on the Bank's research and is not judged at this stop.