[Public Lecture Series] Economics #11 Monetary Policy and Financial Liberalization/Globalization

Hello everyone!
Last time, we learned about the magic of "credit creation," where banks generate money, and the traditional "open market operations," where the Bank of Japan (BOJ) adjusts interest rates in society by buying and selling government bonds.
Today, we start from the point where the BOJ's control techniques reached their limit, where "textbook methods no longer work." This is a theme that approaches the front lines of the modern Japanese economy and the global economy.
Today's title is "Unconventional Monetary Policy and Financial Liberalization/Globalization."
To start the class, let's think about this question to get a feel for the current atmosphere in Japan.
“Do you have your own bank account? Many of you might be depositing money like New Year's gifts. Now, if you were to leave that money in the account for a whole year, how much interest would you actually receive in Japan today?”
If you had deposited "1 million yen," try to imagine how much it would have increased after one year.
For those of you who thought, "Maybe I can buy a McDonald's set?" unfortunately, you are way off. In Japan, until very recently, a super low-interest era continued for a long time where even if you deposited 1 million yen for a year, the interest you received was only about "10 to 20 yen (before tax)," which is unbelievable.
You might think, "I can't even buy a single juice! Why is it like that?" Actually, this is the result of the "unconventional strategy" launched by the BOJ to save Japan from a major recession.
By taking today's class,you will perfectly understand the realistic current state of the financial society we live in, such as "why Japanese interest rates have remained so low" and "why the structure of banks has changed drastically from the past to the present."Let's take a look at the BOJ's breakthrough strategy right away!

1. Textbook methods don't work!? : "Unconventional" monetary policy
In the last class, we learned that "when the economy is bad, the BOJ lowers interest rates (conducts buying operations)."
If interest rates go down, it should be easier for companies to borrow money, and the economy should improve.
However, in the late 1990s, the Japanese economy suffered from deep deflation after the bubble burst, and the BOJ continued to lower interest rates. Finally, interest rates reached almost "0%." This is thezero interest rate policy.
Here, the BOJ is left scratching its head.
“Suppose that even if interest rates are lowered to 0%, the economy still does not recover. Well then, to make the economy even better, can we easily lower them further to "minus 5%?"”
If interest rates were significantly negative, it would mean that "if you deposit money in a bank, your money will decrease like a penalty." If that happened, everyone would withdraw cash from the bank all at once and hide it in their home chests (cash under the mattress). In other words, there is a physical limit to interest rates, which is that "they cannot easily be lowered below 0%."
Having exhausted the "traditional" weapon of lowering interest rates, the BOJ devised an "unconventional monetary policy" after the 2000s that explosively increases the "amount of money" flowing into society.unconventional monetary policy.

The extraordinary strategies unleashed by the BOJ
Quantitative Easing Policy
2001–
This is a policy that stopped targeting interest rates and aimed to directly increase the amount of the foundation of currency (themonetary base) supplied by the BOJ to society. The BOJ bought a large amount of government bonds held by banks and packed the banks' accounts with money.

Quantitative and Qualitative Monetary Easing & Inflation Targeting
2013–
This is the so-called "extraordinary easing" that began under Governor Haruhiko Kuroda. It set a concrete goal (theinflation targeting policy) of "achieving a 2% inflation rate in two years," expanded the market purchase targets from government bonds to stock relatives (ETFs), and printed bills at a pace more than twice as fast as before.

Negative Interest Rate Policy
2016–
Finally, it stepped into forbidden territory. It imposed a "negative interest rate" on a portion of the "money that general banks have no use for and just leave in their current accounts at the BOJ." It was a strategy to strongly push banks, saying, "If you leave it at the BOJ, your money will decrease! So, lend it to private companies or individuals even if you have to force it!"
As described, the background to theprolonged period of low interest rates, where interest rates fell to their limit, was the history of the BOJ's desperate quantitative easing.
By the way, to control the economy, it is necessary to combine not only the BOJ's monetary policy but also the "fiscal policy (adjustment of taxes and budgets)" conducted by the government, like the two wheels of a car. This combination is calledpolicy mix.

What is happening in the world? (Trends in policy interest rates of each country)
While Japan continued to have ultra-low interest rates and negative interest rates, other countries such as the United States and Europe (EU) rapidly raised theirpolicy interest rates (rate hikes) after 2022 to curb the intense inflation that occurred after the COVID-19 pandemic. Because the gap between interest rates in Japan and the world widened significantly, the movement to "sell Japanese yen and buy the US dollar with higher interest rates" strengthened, which also became a factor in the historic depreciation of the yen. And finally, in 2024, Japan also put an end to its long negative interest rate policy and began to steer back toward a world with interest rates little by little.

2. Bank rules have changed drastically: "Financial liberalization" and "globalization"
Now, while the BOJ's policy has changed, the "mechanisms" of the banks and securities companies we use have also changed drastically over the last few decades.
In the past, Japanese banks were protected under the generous protection of the government (Ministry of Finance), with every bank having uniform interest rates and uniform fees, and they were protected so that they would never go bankrupt (this was called the convoy system). However, this did not create competition, and the quality of service did not improve.
Therefore, from the 1980s to the 1990s, the government promotedfinancial liberalizationto liberalize interest rates and business rules. Furthermore, thefinancial globalizationwhere money moves freely across borders also accelerated at once.
Being liberalized, in other words, means entering an era of self-responsibility where "banks that lose in competition might go bankrupt."
After the bubble burst, Japanese banks suffered from a mountain ofnon-performing loanswhere the money they lent would not be returned.
The government, sensing a crisis, established theFinancial Services Agencyto strictly check and supervise the financial industry.
Banks repeatedly merged one after another to survive, and the large banks that once numbered more than a dozen were reorganized into the hugemegabank groupssuch as the megabanks familiar to you today (Mitsubishi UFJ, Sumitomo Mitsui, Mizuho).
Currently, they have evolved into a huge form called afinancial conglomerate(complex financial enterprise), where banks have securities companies and insurance companies under their group umbrella.

3. A Safety Net to Protect Us: Pay-off
You might feel anxious, thinking, "What would happen if the bank where I keep my money went bankrupt!?"
Because financial liberalization created the risk of banks failing, the government established a safety net to protect our deposits. This is the pay-off (deposit insurance system).
In the Common Test, the rules regarding the pay-off's coverage limit are very frequently tested.
[Important Rule] In the unlikely event that a bank fails (goes bankrupt), the coverage limit for protected deposits is "up to 10 million yen in principal plus interest" per depositor, per bank.
Any amount exceeding that will only be returned depending on the status of the bank's remaining assets (*however, non-interest-bearing current deposits, etc., are fully protected).
If you were to start a business or become very successful in the future and saved 20 million yen, rather than keeping it all in one bank, "splitting your accounts (diversified investment)"—such as 10 million yen in Bank A and 10 million yen in Bank B—is what smart adults do for risk management.
Additionally, international rules were created to prevent banks that operate globally from acting recklessly and dragging the world economy down with them if they fail. These are the Basel Committee on Banking Supervision in Basel, Switzerland, which established the Basel Accords (BIS regulations). International standards are strictly set, such as "banks operating internationally must hold at least 8% of their total assets in their own pocket money (capital adequacy) to withstand major losses," and this serves as a common global safety brake for financial globalization.

Summary of Today's Lesson
Monetary policy, which once only involved increasing the amount of currency, has evolved into "non-traditional" dimensions such as quantitative easing and negative interest rates to escape deflation. As a result, we are facing a society with ultra-low interest rates. At the same time, financial liberalization has exposed banks to intense competition, leading to repeated restructuring that resulted in their current form.
Because we live in a free world where it wouldn't be strange for a bank to fail at any time, it is essential to have the knowledge to understand mechanisms like pay-off and manage our money wisely.
Important points for Common Test preparation!

1. The policy taken by the Bank of Japan after interest rates reached 0% to increase the actual amount of money is called non-traditional monetary policy (quantitative easing, negative interest rates, etc.).

2. The amount of the monetary base supplied by the Bank of Japan to the world is called the monetary base.

3. With financial liberalization and globalization, the restructuring of banks progressed, and massive mega-bank groups were born.

4. When a bank goes bankrupt, the payoff limit for deposit protection is "up to 10 million yen of principal plus interest."

5. As a safety standard for internationally active banks, there is the Basel Committee on Banking Supervision's Basel Accord.

Next time, we will finally learn about "The Role of Fiscal Policy and the National Budget," where the government takes center stage. Let's take a look at the dynamic flow of money to see how the taxes we pay are collected and what they are used for.
That is all for today's class. Thank you for your hard work!