Cash in East Asia
Abstracts

Masaaki Shirakawa
The use of cash in Europe and East Asia
Cash is grabbing public attention as well as academic interest recently. The birth of digital currencies
such as Bitcoin is now stimulating the debate on future role of cash. In the face of zero lower bound ofinterest rate, some economists are now arguing for the abolition of currency on the ground that theexistence of cash prevents interest rate from declining below zero and thus constrain the effectivenessof monetary policy. In Europe, there is a political call for the abolition of high denomination banknotewhich is allegedly used for tax avoidance or illegal activities.
Bearing these arguments in my mind, I will start my remarks by making factual review of how cash isused in Europe and East Asia with special emphasis on Japan. Specifically, I will examine factors
affecting cash/GDP ratio across time and countries. Then, I will take up negative interest rate policy
and argue that the case for abolition of cash is quite facile. By doing so, I will ponder fundamental roleof cash.

Friedrich Schneider
Shadow Economy and Corruption in Europe and Asia –What did we learn over the last 20 years?
In my presentation I will introduce the latest developments and make some theoretical considerations
about the shadow economy and corruption. Moreover, I will discuss the estimation method and size of
shadow economies in Indonesia and in some other countries. The effects of corruption on the official
economy will be analyzed as well. Finally, some policy measures to reduce the shadow economy andcorruption will be discussed.

Rüdiger FrankRemonetization and its effects. The case of North Korea
North Korea has been, and arguable still is, an extreme case of a state socialist system. Due toideological and economic reasons, by the late 1980s the country had been largely demonetized in thesense that money existed but was unable to fulfill its basic functions. A massive economic shock
resulting from the collapse of the global socialist system after 1990 contributed to a re-monetization
including a reform of the domestic currency since the mid-1990s. Individuals have reacted in a
predictable way, thus weakening the power of the state. Currently, North Korea is in some aspects
more monetized than for example East Germany in 1989 thanks to the de facto existence of parallel
currencies. This paper covers the process of re-monetization, the impact on society, and the state’s
half-hearted efforts at curbing these effects which we only begin to fully comprehend.

Hwee Kwan Chow
Domestic Liquidity Conditions and Monetary Policy in Singapore
Singapore has a unique exchange rate-centered monetary policy framework that has served theeconomy well over the past decades. Monetary policy operations are carried out by the central bankthrough the management of the Singapore dollar against a currency basket. As is well recognized, suchforeign exchange interventions do have an impact on domestic liquidity conditions. However, in thecase of Singapore, this tends to be counteracted by the liquidity impact of public sector operations
related to the fiscal position and the national pension scheme. The central bank takes into account thenet liquidity impact these and other autonomous money market factors as well as banks’ demand forfunds when performing money market operations to regulate the level of domestic liquidity in thebanking system. Finally, we explain the negligible liquidity impact of currency in circulation asreflecting Singapore’s gradual transformation towards a cashless society.

Franz Waldenberger
Changes in the investment-savings nexus and the future of credit money in Japan
Modern monetary systems rely on two money creation channels. Money can be created through anincrease in the circulation of central bank money and through an increase in loans made bycommercial banks. The later is possible, because deposits at commercial banks that are used as meansof exchange and also as a source of financing these loans, are not fully backed by central bank money.
Since the burst of the real estate and stock market bubble in Japan beginning of the 1990s, Japan’s
private corporate sector has been generating financial surpluses, which means that the sum of private
corporate investments exceeded the sector’s total internal sources of finance (free cash-flow).
Therefore, despite the strong decline in private household savings caused by the aging of thepopulation, the private sector as a whole has been able to continuously generate savings surpluseslarge enough to finance the built-up of a record high government debt and the world’s largest net
foreign asset position.
With the rapid and extreme expansion of the monetary base as a result of quantitative easing, Japan’scommercial banks have been selling more and more of their holdings of government bonds to theBank of Japan. Given the lack of credit expansion opportunities they in return increased their excess
reserves deposited with the BoJ. This has de facto raised the reserve ratio of private bank deposits. As
the operations continue, Japan will move towards a fully backed reserve money system, drying out thecredit channel of money creation.
The presentation will argue that this is unavoidable given the combination of changes in theinvestment-savings nexus on the one hand and the monetary policy measures on the other hand. Given
the viability of a fully backed reserve system, this de facto shift in the monetary regime seems to cause
no fundamental problem. However, the implementation of negative interest rates on commercial bankreserves bears the risk of reversing this shift with most likely negative consequences.

Woosik Moon
Coinless society as a way to cashless society: the case of Korea
Bank of Korea (BOK) is planning a coinless society by 2020. This plan was initially motivated by theneed to save the cost of minting coins and to help the change-over in case of possible redenominationof Korean won. But as Korea is well equipped with cashless payments such as credit cards and fintech payments, this plan is expanded further to test the possibility of cashless society before shifting
ultimately to it. Eliminating coins out of circulation means that BOK develop an alternative payment
instrument to coins for receiving and returning small change. That is, if an individual buys a 9,500
won item and pays with a 10,000 won banknote, he should own credit cards or other electronic
payments to be credited 500 won instead of getting a 500 won coin in change. Many alternative
instruments such as credit cards, public transportation cards, e-wallets and electronic cash receipt canbe considered in terms of information protection risks, economic transaction costs and technicalconveniences. If coins can be successfully removed by these instruments, cashes can be more easily
replaced. This study tries to explore the best way toward coinless society in Korea.

Patrick HessThe Ongoing Evolution of Payment Instruments in China
Payment methods and habits are evolving over time, as a result of technological innovation andcommercial development. China, where state-issued paper money was invented 900 years ago, is noexception to this. This presentation looks into the evolution of payment instruments in mainland China.
In particular it explores the growth of non-cash payments in recent years, their main drivers and theircoexistence with traditional means of payment such as cash transactions and cheques.

Helmut Siekmann
Restricting the Use of Cash in the European Monetary Union – legal aspects
Clear signs are visible that the use of cash is being increasingly restricted inside the European
Monetary Union (EMU). Already for quite some time financial institutions but also governmententities have exerted pressure on businesses and consumers to refrain from using cash. This has beensuccessful to a varying degree in the Member States of the EU that have introduced the euro. In somecountries this drive or the preference of consumers and businesses has widely replaced cash as ameans of payment or storage of value. In others, like Austria and Germany consumers have been
defiant.
The main argument for the drive was cost-effectiveness. The handling of cash was declared expensiveand risky; mainly by economists. Empirical evidence is, however, scarce and in fact tends to show theopposite; at least for small amounts of money to be paid. More recently, the pressure has been
augmented considerably. Not only statutory rules have been enacted that government cashiers areclosed and payments with government-entities have to be performed by using bank accounts only butalso by introducing differing but rather low limits for using cash in business transactions. In addition,
talks by politicians are up-scaled to eliminate the 500 euro bill entirely. This time the argument isfighting criminal activities and in specific terrorism. It is an open question whether the true reason isthe enforcement of the recent measures of the European System of Central Banks (ESCB): negativenominal interest rates and inflation targeting. Consumers and financial institutions are beginning toprotect themselves against these measures by hoarding cash.
Several legal concerns rise in this context both from European Union law and national constitutional
law; specifically in Germany. The total abortion of cash would neither be compatible with EU-law nor
with German constitutional law. Although Article 128 TFEU only allows (“may”) the European
Central Bank (ECB) to issue euro-banknotes the clause has to be interpreted in a way that it presumes
the existence of cash. The ECB does not have the power to abolish it. The same result may be derivedfrom Article 20 paragraph 1 federal constitution of Germany (“social state”). Restricting the use ofissued banknotes and coins denominated in euro would be incompatible with their property of being
legal tender following Article 128 TFEU. It is highly questionable whether such measures would be inconformity with the principle of proportionality enshrined in Article 1 paragraph 1 and 4 TEU andprotocol no 2 of the primary law of the EU. Additional doubt are derived from the constitutional lawof the Member States.
The obligation to accept cash denominated in euro follows already from its virtue as legal tender; alsofor government entities. In addition, this result follows also from the EU-Commission decision
2010/191/EU of 22 March 2010; notwithstanding recital 19 of regulation (EC) 975/98 that is legally
not part of the norm.

Erwin Gladisch
Does cash have a future in Germany?
Cash is by far the most common means of payment in Germany – it was used for around 53% of thetotal value and 79% of the total volume of point-of-sale transactions in 2014. Nevertheless, sometimes
people argue that cash seems to be expensive and will disappear in the near future.
Comparing the different cash studies doubts about the level of cash costs are appropriate. The resultsof studies concerning the cost of cash differ in a wide range and are influenced mainly by specificcharacteristics of the country’s payments system and the scale at which a payment method is used in
the country.
Also the hypothesis about an end of cash payments is questionable. It seems that consumers will keep
cash as a means of payment for the future, at least as long regulative or administrative measures will
not influence the use of cash in a negative way.