ANDofECONOMICSTUDIESTechnologies/MAY 2000
Forum on MONETARY
the Development
Electronic Payment

Forum on the Developmentof Electronic Payment
Technologies and
Its Implications for
Monetary Policy:
Interim Report

Executive Summary
In December 1997, the Bank of Japan established the Forum on the Development ofElectronic Payment Technologies and Its Implications for Monetary Policy. The
objectives of the forum were to analyze the emergence of electronic means of
payment including electronic money and its implications for monetary policy. The
forum has met eight times and discussed a number of issues. This report summarizes
the main findings of the forum.

• Definition and Development of Electronic Means of Payment

The term “electronic means of payment” is defined, in this report, as payment
services that utilize information and communications technologies including
integrated circuit (IC) cards, cryptography, and telecommunications networks. For
the purposes of this report, electronic means of payment are categorized into either
stored-value products or access products. Stored-value products are the instrumentsof effecting payments electronically by storing the record of funds in an electronic
device in the consumer’s possession such as an IC card or a personal computer
together with appropriate software. The amount of stored value is increased whencash or deposits are received, and it is reduced when goods or services are purchased.
By contrast, access products are instruments of effecting payment electronicallyby accessing conventional payment services including electronic fund transfers via
computer networks such as the Internet.
While electronic means of payment are undoubtedly suited for electroniccommerce transactions over computer networks, it is difficult to tell whether they
will be widely used also for face-to-face transactions. Stored-value products have beendeveloped primarily for micro-payments. Since there is no interest paid on the stored
This is the English-language version of the Interim Report, which was originallypublished in Japanese on May 27, 1999.

1

value, the higher the transaction amount the greater the loss of interest (opportunitycost) that should be accruing during the period after converting cash and deposits
into electronic value stored but before making payments for transactions. As such,
stored-value products are likely to be used only for small-value transactions in theforeseeable future. In the meantime, access products will probably be used fortransactions involving relatively larger amounts.
There are several possible scenarios describing how electronic means of payment
could develop. For example, if so-called digital goods such as news, books, andmusic—the value of which lies in the information rather than the physicalmedium—come to account for a greater part of the overall economy, the use ofelectronic means of payment may increase. If the function of stored-value products aspayment instruments were supplemented with interest payments, it would have agreater potential to become a substitute for deposits. Many factors impinge on thedevelopment of electronic means of payment, including unexpected technologicaladvances, and this makes it difficult to theoretically anticipate its future direction.
Therefore, these developments should be monitored closely.

• The Development of Electronic Payment Technologies and Its Implications for

Monetary Policy
Using economic theory, the forum participants examined the issues that thedevelopment of electronic payment technologies—including the emergence of bothstored-value products and access products—would raise for the central bank in
implementing monetary policy. A relatively prevalent view among the forum
participants was that the new electronic means of payment could be regarded as a
new form of private bank debt that could be used as a payment instrument and, if
further simplified, as a new type of deposit.
Based on a simple monetary multiplier model, if electronic means of payment
were substituted for cash and deposits but were not subject to reserve requirements,
the development of electronic means of payment would increase the money
multiplier. However, several remarks should be noted in this respect. First, it ishighly likely that, in the process of the development of electronic means of
payment, the money multiplier will be destabilized and therefore will become
harder to predict. Second, the simple money multiplier model makes no distinction
between lending by banks and lending by issuers of electronic means of payment,
and such a premise would be inappropriate if the latter were subject to prudential
regulation. Third, even if the issuers create credit, it is unrealistic to conclude thatthe credit will be created infinitely.
With regard to the demand for money, the development of electronic payment
technologies would reduce the cost for consumers to convert deposits to cash(the cost of visiting banks), would have the effect of saving non-interest-bearing cash
outstanding, and thus would reduce the demand for money. It should be noted that,in the process of the development of electronic means of payment, various shocks
unanticipated by the central bank could occur both from the money supply sideand the money demand side. Applying Poole’s classical theory, it would be
generally desirable for central banks to adopt interest rate stabilization policies

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Forum on the Development of Electronic Payment Technologies

if the widespread use of electronic means of payment were to cause frequent andunanticipated shocks to the monetary sector (the LM curve).
Most central banks set targets for short-term interest rates. In considering how
the development of electronic payment technologies affects central banks’ ability tocontrol short-term interest rates, it would be necessary to study the possible impact ofsuch a development on reserve demand and on the reserve requirement system. It is
likely that reserve demand would decrease, because the spread of electronic means of
payment would encourage a shift from deposits that are subject to statutory reserve
requirements to electronic payment instruments that are not. However, in controllingshort-term interest rates, the size of the reserve demand would not be so critical as thestability and predictability thereof. In other words, what is important would be forthe issuers of electronic payment instruments to make payments final throughcurrent accounts at the central bank in a stable and predictable manner. Therefore,
it is necessary to study, from a wide range of perspectives, the impact that thedevelopment of electronic payment technologies would have on the existing
payment systems.
It is important to keep reserve demand stable for the implementation of monetary
policy. To achieve it, possible policy responses might be to apply the same reserve
requirements to all payment-oriented financial obligations, to pay interest on reserve
deposits, or to abolish reserve requirements altogether.
The participants in the forum did not agree on whether electronic means of
payment had the potential to become a substitute for central bank money in the
future. This issue will require further research.

• Electronic Payment Technologies and Cross-Border Transactions

The development of electronic payment technologies might increase cross-borderelectronic commerce transactions, together with such other factors as the liberalization of foreign exchange controls. As cross-border transactions become moreprevalent, they might encourage consumers to hold more foreign currencies forpayment purposes in order to reduce foreign exchange risks, and to hold more
foreign currencies for savings purposes through Internet banking.
In short, holding foreign currencies could be either for payment purposes orfor savings purposes. These two should be distinguished when considering theimplications of the increased use of foreign currencies for monetary policy.
When foreign currencies are used for payment purposes, a part of domestic
economic activities would be settled in foreign currencies and therefore the capabilityof domestic currency interest rates to influence the domestic economy would be
impaired. When foreign currencies are held for savings purposes, there would be astronger arbitrage of the domestic long-term real interest rate against those in othercountries. In either case, the central bank would be able to maintain its ability tocontrol domestic short-term interest rates by providing base money in the domestic
currency. However, under such circumstances, the central bank would be required
to pay closer attention to foreign economies and foreign exchange markets when
implementing its domestic monetary policy.

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I. Preface
Rapid advances in information technology are producing a new digitalization of
payments. In the private sector, there have been a number of electronic money pilot
programs conducted around the world geared generally at consumers, and efforts are
now under way to raise electronic money to commercially feasible levels. Meanwhile,
governments around the world have been preparing environments that willencourage the sound development of electronic payments. In Japan, the Study Groupon an Environment for Electronic Money and Electronic Payments, a subsidiaryorganization of the Financial System Research Council, issued a report in June 1998,
and legislation to support such development is in preparation.
Electronic money and other forms of electronic means of payment offer such ahigh degree of convenience that they could potentially replace not only the cash thatis now supplied under central bank monopolies but conventional bank deposits aswell. Electronic means of payment have the potential to impact monetary policy inno small measure. A 1996 report from the Bank for International Settlements (BIS)1
notes that the development of “electronic money” raises a number of policy issues
for central banks because of the possible implications for central bank seigniorage
revenues and monetary policy and because of central banks’ general interest in
payment systems.
In December 1997, the Bank of Japan established a forum to examine the issues
in monetary policy raised by electronic payment technology and potential policy
responses from both theoretical and practical perspectives. The forum has met eighttimes, during which it held vigorous discussions of jointly authored papers by forum
members (experts from academia and government) and the secretariat staff.2 This
document is an interim report that introduces some of the arguments made in theforum papers and the major points that emerged from discussions at the forum. The
opinions contained herein do not necessarily represent the official positions of the
Bank of Japan or of the Ministry of Finance and the Economic Planning Agency,
which attended the forum as observers.
Electronic means of payment are still in development, and it is virtually
impossible at this time to accurately predict how and in what form they will spread.
The purpose of the forum is to engage in thought experiments using the major
features of existing electronic means of payment, current economic theory, andexamples of financial technology advances around the world. The forum confirmedthat the spread of electronic means of payment could result in phenomena similar
to those already experienced in other situations, and underscores the potential
for electronic payment technology to change existing economic structures and theeconomic order structurally.
Below is an overview of the structure of the report.
Chapter II describes what is currently known about electronic means of payment,
including definitions of the terms and concepts in this report, classifications of the
1. See the BIS, Implications for Central Banks of the Development of Electronic Money, 1996.
2. See Attachment 1 for a list of members and Attachment 2 for a description of the discussions.

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Forum on the Development of Electronic Payment Technologies

forms of conceivable electronic means of payment and summaries of their positions
within the overall monetary framework. Following this, the report provides a broadlist of potential avenues for long-term development.
Chapter III examines arguments concerning the impact that the spread ofelectronic means of payment will have on the macroeconomy as a whole and on
monetary policy in particular. The report begins by considering the impact that the
spread of electronic means of payment will have on the credit creation process andthen briefly examines how this will influence consumers’ demand for money. From
there, the report examines the impact on monetary regulation, which is the front lineof monetary policy for central banks. The chapter refers to potential policy responses,
including modifications to the reserve requirement system. The chapter concludes
with a discussion of the influence that the spread of electronic means of payment will
have on central bank seigniorage and raises issues about whether electronic means of
payment will be able to take the place of the currencies issued by central banks.
Chapter IV focuses on the potential for electronic means of payment to promote
cross-border transactions and payments, and examines the influence on monetary
policy in cases where foreign currency payments are prevalent.
Chapter V sets out the issues still to be examined in light of discussions at theforum to this point.

II. Electronic Payment Technology Defined
A. Electronic Payment Technology and Electronic Means of Payment
This forum covers the electronic payment technology that provides a vehicle forthe electronic payments that are being actively developed around the world using
IC cards, cryptography, telecommunications networks, and other information andcommunications technologies. This report refers to specific payment services utilizingthese technologies as electronic means of payment. Most of these means will forthe foreseeable future be provided primarily for retail transactions. Electronicmoney, which has been the subject of several pilot programs around the world, is one
example of an electronic means of payment.
Electronic payments have already been widely used in wholesale transactions, i.e.,in transactions between the central bank and private banks and between privatebanks and large companies. However, little progress has been made on the introduction of electronic payments into the retail area, for example, because of the cost issues
involved. In recent years, this has changed, and many electronic means of payment
have begun to be provided primarily for retail transactions. There are two major
reasons for this: (1) advances in information and communications technologies havemade it feasible to provide electronic payments at low cost, and (2) newspaper andmagazine articles, music, and other forms of information, which are targeted at retailtransactions, have been provided in digital form, so there is a greater need to buy andsell these products electronically.
Several technological factors were at work in making it possible to computerize
retail payments: (1) the development of IC card technology enables monetary5value to be stored relatively securely even without a large-scale computer system;(2) similarly, advances in cryptography have improved the security with whichmonetary value can be stored and make it realistically feasible to authenticate theidentity of the counterpart and maintain the confidentiality of transmitted data;and (3) the development of the Internet and other open network systems has made it
possible for ordinary consumers to make payments remotely at low cost.
Currently, several new electronic means of payment have been proposed aroundthe world, but almost all of them use some form of a traditional bank deposit transfer
and therefore do not represent completely new systems independent of the current
payment system, which is centered around current accounts at the central bank.
However, there are some electronic means of payment that differ markedly fromtraditional deposit transfer payments, for example, because they use decentralized
processing in which the provider of the means of payment does not control ormanage individual transactions.
The forum categorized electronic means of payment as either stored-value
products or access products depending on where they store monetary value and also
on the mechanisms they use for payment. Table 1 illustrates the two categories.
Table 1 Categories of Electronic Means of Payment
Electronic means of payment
Stored-value
products(i.e., electronicmoney)

IC card-based products:
Effecting payment by storing electronic value in an IC card and presenting the IC
card to deliver the value to a counterpart.
Network-based (software-based) products:
Effecting payment by storing electronic value in software residing on a personal
computer and transmitting it over a network.
On-line banking products:
Effecting payment through networks by issuing transfer instructions for deposit
accounts.

Access products

Credit card-based products:
Effecting payment by using cryptography to transmit credit card information
securely to a retailer, after which funds are moved from deposit accounts.
Electronic checking-based products:
Effecting payment through networks by sending check information electronically,
after which funds are moved from deposit accounts in the same manner as if anormal check had been presented.

1. Stored-value products
Stored-value products are a means of effecting payment electronically by storing
electronic value (or the right to claim electronic value), which is electronic data
issued in exchange for cash or deposits, in an IC card or personal computer
software managed by the holder of funds and delivering or rewriting thiselectronic value to a counterpart when purchasing goods and services.3 It is
3. This report uses the term “stored-value product” in the sense that systems are designed to control data using
software in an IC card or personal computer owned by the user. This may differ from the legal interpretation
concerning the locus of value.

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common to refer to stored-value products as electronic money, and when we use theterm “electronic money” without further qualification in this report, we are referringto stored-value products.
Stored-value products can perhaps be regarded as an advanced form of the prepaid
cards that have already spread, for example, as telephone calling cards. That is,they feature (1) improved security through the use of IC cards and cryptography;(2) general use not limited to specific purposes and applications; and (3) the ability
to restore the principal of the electronic value on the card to cash or deposits. The
term “stored-value products” is not homogenous. It refers to both products that store
electronic value on IC cards and also products that store electronic value in softwarethat resides on standard personal computers.4
Figure 1 contains an example of a mechanism that might be used for astored-value product.
Figure 1 Mechanism of a Stored-Value Product (Example)
Provider of a stored-value product (in this case, a bank)(5) Deposit transfer
Depositaccountof B or C(2) Deposit transfer

Provider’s deposit
account (pool offunds to back issues)(4) Presentationof electronicvalue(2) Payout of electronic value(3) Electronic valueC

A’s deposit
account(3) Electronic value
B: Payee(3) Goods and services(1) Instruction
to purchaseelectronicvalue

A: Payer(3) Goods and services(1) Individual A indicates to the bank with which he holds his deposit account that he wishes
to purchase electronic value.
(2) Having received these instructions, the bank transfers an amount equal to the electronicvalue issued from the deposit account A to the “pool” account that backs issues (butthese funds are not managed according to the individual users), and simultaneously
issues electronic value to A.
(3) A pays electronic value to Shop B in exchange for goods and services (there may be
stored-value products which can or cannot be used as vehicles to effect payments ofthis electronic value to a third party, C).
(4) B or C presents the electronic value received to the bank for conversion to cash or
deposits.
(5) The bank confirms the authenticity of the electronic value presented and transfers theamount from the pool account to the deposit account of B or C.

4. It is possible to further divide stored-value products into IC card-based products and network-based products(or software-based products in which electronic value is stored in software on a personal computer and this is used
to effect payment by transmission over a network) depending on the medium used to store electronic value, butthese are essentially the same in that they both store monetary value with the user.

7

The way in which the electronic value received in exchange for goods and services
is subsequently processed will differ from product to product. Some may allow it to
be used for payment to other agents (in Figure 1, the product that allowed B to use
electronic value received from A to pay C) without having to convert to cash or
deposits; others may require conversion (in Figure 1, the product that required B topresent electronic value received from A to the issuer for conversion to deposits). The
former is referred to as having transferability,5 and it is because of these characteristics
that stored-value products are said to be similar in nature to cash. However, most of
the products in the pilot programs do not have transferability.
2. Access products
Access products are an electronic means of payment that uses the Internet orother network and a standard personal computer or similar equipment toremotely issue payment instructions to a centrally processed means of payment
such as a deposit transfer system. In access products, the monetary value does
not reside with the user; it is always with the provider of the means of payment,that is, the bank holding the deposit account.
One example of an access product is the service that enables consumers to issue
deposit transfer instructions by means of standard low-cost personal computers andInternet connections (the on-line banking products shown in Table 1). This is reallya part of the firm banking service that began to be used between large corporations
and banks about 20 years ago. Thanks to advances in telecommunications andcryptography, it is now sufficiently inexpensive for it to be used by consumers andsmaller businesses.
Other examples would include means of payment that utilize cryptography toenable the secure transmission of credit card numbers and expiration dates via
Internet web sites (credit card-based products in Table 1), and the means of paymentthat enables electronic checks to be written over a network (electronic checking-based
products in Table 1; these are being used on an experimental basis, mostly in the
United States).
In fact, however, deposit transfers over ATMs, credit cards, and debit cards6 arethemselves means of payment that access computer centers which manage monetary
value via networks from remote ATMs or terminals located in member stores. In thatthey make it easier to transfer funds from remote locations, these means of payment
are essentially the same as more recent access products because they represent
an improvement in convenience concerning deposit transfer. In other words,
access products can be considered to be technologies that extend these existingmeans of payment.
Given the progress that has been seen in technology, there could reasonably besome difference of opinion on what to treat as electronic means of payment. The BIS(1996) defines access products as “products that allow consumers to have traditional
payment services by electronic means of communication (for example, use of astandard personal computer and a computer network such as the Internet to make a
5. This means that monetary value is passed from hand to hand without being returned to the issuer.
6. A card enabling the holder to have purchases directly charged to funds on his account.

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credit card payment or to transmit instructions to make funds transfers betweenbank accounts).” It does not, therefore, include traditional deposit transfers andcredit cards themselves as access products, choosing instead to focus on more recentmeans of payment. The forum has followed this practice in this report, where—
for the sake of convenience—deposit transfers, credit cards, and debit cards, whichhave been in existence for a considerable period of time, are not included in theterm “access products.”7
Figure 2 gives one example of a mechanism that might be used for an accessproduct.
Figure 2 Mechanism of an Access Product (Example)

Provider of an access product (in this case, a bank)(2) Deposit transfer
B’s deposit accountA’s deposit account(1) Deposit transfer instruction

B: Payee

A: Payer(3) Goods and services(1) Individual A, via network, instructs the bank with which he has his deposit account tomake a deposit transfer.
(2) Based on the transfer instruction from A, the bank makes a transfer of funds from A’s
deposit account to the deposit account of Shop B.
(3) B delivers goods and services to A.

B. Position of Electronic Means of Payment
At the present time, there is no single specific means of payment that is used in all
situations. Rather, several means are used depending on the conditions involved—use
is segregated. This section addresses how the various electronic means of payment are
positioned in light of this segregated use. Understanding this will be valuable ingrasping the position of electronic means of payment within the overall scope of
economic activities.
7. To effect payments with credit cards or debit cards, a member store or user employs a closed network shut off
from third parties to access the credit card issuer’s database or a bank deposit account. By contrast, recent accessproducts that transmit credit card numbers for electronic commerce purposes generally utilize the Internet, an
open network that utilizes commonly available technologies and can be simultaneously accessed by third parties.
Because of this, there is a greater need with the latter to maintain security with the use of cryptography and IC
card technologies, for example.

9

1. Segregation by type of transaction
Electronic means of payment, especially access products and network-based productsof stored-value products, are considered to be more suited to electronic commercethan are means of payment that involve the use of cash or other physical media. In
the United States, the market for electronic commerce reached ¥1,252.5 billion8 in
fiscal 1997, a size that cannot be ignored.9 Most of these transactions seem to besettled by electronic means of payment (access products), specifically, by inputting acredit card number and expiration date over the Internet. The domestic market forelectronic commerce in Japan was only ¥81.8 billion10 in fiscal 1997, which is far
smaller than in the United States, but the growth rate was high: 2.87 times that ofthe previous fiscal year,11 which indicates a distinct potential for electronic means of
payment to spread as electronic commerce expands.
Pilot programs have been conducted around the world to test the use of electronicmeans of payment for ordinary face-to-face transactions. However, general users inthose programs do not find much advantage to them other than the fact that they do
not need to carry around cash. There have been scarcely any cases of electronic meansof payment achieving widespread use in face-to-face transactions at this time.
It is therefore difficult at this time to determine whether electronic means of
payment will be used only for electronic commerce or whether they will achieve
widespread use both in electronic commerce transactions and in face-to-facetransactions. This is, however, one question that must be answered in order todetermine the volume position of electronic means of payment within the payment
system as a whole, so it is necessary to continue monitoring the results of pilot
programs closely.
2. Segregation by amount of transaction
Common practice in Japan is to use cash for small payments and credit cards forlarger sums. In Europe and North America, debit cards are spreading as a means of
payment for the medium level situated between cash and credit cards.
Most stored-value products are marketed as being for small-amount transactions,and statistical data from the pilot programs indicate the average value per transaction
to be in the range of several hundred to around ¥2,000, which would seem to backthis up.12 The reasons for this are not only that stored-value products were developed
for retail transactions that had not previously been electronic, but also that as thevalue of the transaction rises, so does the amount of interest lost (or opportunitycost) during the period from the time cash or deposits are converted to electronicvalue to the time of payment, while if these large-value transactions are settled withcredit cards there are larger benefits to the one-month delay in payment. Because
8. See the Ministry of Posts and Telecommunications, ed. White Paper Communications in Japan, 1998.
9. While this is a small proportion of total transaction values in the U.S. retail sector (0.4 percent in 1997), an
analysis by the Electronic Commerce Promotion Council of Japan (ECOM) indicates that the market will growto 2 percent of total retail transaction values in the next three to five years.
10. See the Ministry of Posts and Telecommunications, op. cit.
11. Similar to the case of the United States in Footnote 9, the ratio of electronic commerce to total retail transaction
values was a mere 0.05 percent in Japan in 1997, but the same ECOM analysis forecasts that it will grow to
1 percent in the next three to five years and 3.5 percent in the next five to ten years.
12. Most of the pilot programs currently being conducted place a ceiling in the tens of thousands of yen range for theamount of value that can be stored in IC cards or computer software.

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Forum on the Development of Electronic Payment Technologiesof this, it seems appropriate to conclude that stored-value products will for theforeseeable future be used primarily for small-value payments.
For access products, the average amount per transaction will probably behigher than for stored-value products because they merely involve remote use ofcredit card payments and deposit transfers.
C. The Potential of Electronic Payment Technology
Electronic means of payment comprise many new technologies, and a wide range ofparties is involved in it. What it will look like and how it will be used in the future
will depend to a great extent on unexpected factors such as developments in information and telecommunications technology or the business strategies of individual
agents. This makes it extremely difficult to arrive at any theoretical forecasts.
Throughout this chapter so far, it has been assumed that the technologies andpayment mechanisms do not change from what is available at the present time, andthose electronic payment technologies with the greatest potential have been targeted.
However, this by itself carries the risk of misreading the medium- and long-term
potential of electronic means of payment, so this section contains a broad list of
the latent potential developments inherent in these means. It should go without
saying that there are many directions that electronic payment technology could takein its development and it is difficult to blueprint its possible future at this stage.
Rather, the development of electronic payment technology should continue to becarefully observed.
1. The spread of digital goods
When the value of a good is in its information (this report will refer to this as a“digital good”),13 it is by nature possible to purchase and transport the good entirely
on a network. It is therefore inefficient for both the producer and the consumer touse cash or other physical media just for the payments associated with commercial
transactions in digital goods. While there are still many hurdles to be overcome,including the security technology required to prevent unauthorized access and thehandling of copyrights on digital goods, the greater the percentage of overall
economic activities accounted for by transactions in digital goods, the greater the
potential for the spread of electronic means of payment.
As already discussed, most existing stored-value products have been developed sothat they can be administered at low cost on condition that they will be used forsmall-value payments. It has been pointed out that digital goods may increase
settlement of small-value transactions—the few yen that it would cost for a single
news article or a single song (i.e., micro-payments). In fact, several products haveemerged that are focused entirely on such micro-payments, and the availability ofthese products raises the possibility of expanding electronic commerce to theextremely small-value transactions that have not hitherto existed.
2. Spread of payments outside the existing interbank payment system
As discussed in Section II.B, stored-value products use decentralized processing
and some of these products possess a technical capability for transferability of value.
13. Examples might include news, books, music, and financial instruments.

11

At the present time, however, there are in fact few cases of electronic value actually
being transferred. The primary reason is probably the low degree of general
acceptance of those products. If this hurdle can be cleared, however, then there could
conceivably be more cases in which payments are completed by the exchange ofelectronic value directly between the parties involved. Even with access products,
were a payment system to be organized between providers of electronic means of
payment that differed from the existing interbank payment system, this system would
have the potential to emerge as the main payment system. In other words, the use ofelectronic means of payment contains the possibility of developing payment outside
the existing interbank payment system.
3. Combination with services using electronic equipment
Electronic means of payment work by exchanging electronic data, and they cantherefore be easily connected with services provided by the use of electronicequipment. As examples of those services already in or close to commercial
application, we would point to payments of public telephone charges, automatedturnstiles in bus and train stations, and payments of expressway tolls. If high degrees
of convenience can be achieved through a combination of electronic equipment
and electronic means of payment, then there is a potential for widespread use ofelectronic means of payment.

III. The Development of Electronic Payment Technology
and the Impact on Monetary Policy
This chapter considers the issues that will be raised for monetary policy by thedevelopment of electronic means of payment, including stored-value products andaccess products. Below is a summary of the points discussed at the forum.
Before discussing the main subjects, it should be noted that (1) when one
examines the linkage between monetary policy and the real economy, it may be betterto consider the impact of technological changes as a whole rather than of just one
electronic payment technology,14 and (2) central bankers and academic economists
still have many points of dispute and there is no broad consensus about thetransmission mechanism of monetary policy, i.e., the way in which changes in themoney supply influence prices, real GDP, and other variables in the real economy.
In consideration of these reservations, this report has limited its analysis to theeffects that the development of electronic payment technology are likely to haveon the central bank’s ability to control the money supply.
A. Is Electronic Money Cash or Deposits?
It is crucial to clarify the stage of development of the electronic money analyzed
by this report when discussing the effect of the development of electronic payment
14. For example, technological progress has a significant effect on the price concept that is the goal of monetary
policy, for it will change the quality of goods and services. In this sense, the development of electronic payment
technology is merely one part of a broader spectrum of technological advance, so it is necessary to rethink theconcept of monetary policy itself—for example, how to select a new goal as a result of technological advances.

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technology on monetary policy. If one is discussing electronic money that is merely
an extension of current bank deposits and guaranteed to be exchangeable forhigh-powered money, the premises will markedly differ from what they will be if
one is discussing electronic money issued in accordance with “Hayek’s freebanking,”15 which behaves as if it were the second central bank. Therefore, thischapter begins by clarifying the development of electronic money from the viewpointof its economic functions, so that subsequent discussions will be easier to grasp.
The opinion supported by the majority of the forum members was as follows.
That is, for the foreseeable future electronic money (stored-value products)
should be considered one form of new private bank debt that can be utilized asa means of payment, and therefore its development should be viewed as the
emergence of a new kind of deposit.
For simplicity, the following discussion will refer to any company that is able toissue debt which can be used as a means of payment, as a “private bank.” In otherwords, the concept of private bank used here includes both existing banks andcompanies that will enter the payment business, issuing electronic money.
It must be underscored here that electronic money is viewed only as a deposit, notas cash.16 Certainly, electronic money is extremely similar to cash in that it enables
the use of decentralized processing to settle payments between the parties involved,
and in some schemes it can be transferable. However, for the foreseeable future,electronic money is unlikely to prevail widely unless it is backed by a guarantee ortrust that it is fully convertible to cash (central bank debts) just as are current bankdeposits.17 Therefore, for the time being, electronic money itself will merely be a debt
issued by a private bank—that is, a deposit—and will not provide the kind of finality
supplied by cash and reserve deposits (i.e., debts of the central bank).18
That still leaves the question of how to define access products including
more advanced forms of credit card and on-line banking. As noted in Chapter II,
access products use electronic methods to achieve easier and quicker movements offunds through transfers of existing deposits. Therefore, the development of accessproducts can be considered equivalent to the emergence of a new form ofdeposit, in that they improve the convenience (attractiveness) of bank deposits.
In the discussion of the impact on monetary policy from Section III.B onward, it
will be understood that the emergence of electronic means of payment, whether they
are stored-value products or access products, implies the emergence of new andhighly convenient deposits.
15. In his work, Denationalization of Money (1976), Hayek argued that the monopolistic issue of nonconvertible
money by the central bank should be abolished and that private banks should be given the right to issue it.
Hayek’s basic assertion was that competition between multiple currencies would result in the survival of thecurrency that could maintain the most stable purchasing power.
16. In this report, cash refers to a means of payment that completes the settlement by its transfer (that has finality).
It is generally the debt of the central bank. By contrast, deposits, which are private bank debts, do notby themselves have finality. They usually become means of payments only when their convertibility to cash
is guaranteed.
17. If this conversion is into not yen but U.S. dollars or another foreign currency, then the phenomenon will be
regarded as dollarization.
18. However, one cannot completely disregard the possibility that electronic money will come to have a finality
similar to cash, i.e., that it will circulate as a nonconvertible currency. We consider this possibility further in
Section III.E.

13

B. The Development of Electronic Payment Technology and Credit Creation
In considering the effect that the development of electronic payment technology will
have on the central bank’s ability to control the money supply, one must address thequestion of how the traditional credit creation process that currently relies only on
existing bank deposits will be changed.
1. The development of electronic payment technology and the rise in the money
multiplier
Using the simple money multiplier theory, it is easy to understand that anincrease in electronic money stock19 will raise the money multiplier.20 This result
is entirely natural, as long as electronic money is considered to be a substitute forexisting cash and deposits and not subject to statutory reserve requirements.21 What ismore, in the world of textbook-style money multiplier analysis, an increase in themoney multiplier itself is not essentially a problem. The theoretical conclusion formonetary policy after the spread of electronic money would merely be that “theaccelerator pedal is more sensitive, so you need to press lightly.” However, the forum
also noted the following problems with this rather simple conclusion.
First, the money multiplier will probably be more unstable during thedevelopment of electronic money than now. Even though the money multiplier
has always been unstable, its movements have been cyclical in nature. But aselectronic money spreads, an upward shift will be added. Therefore, in the process ofthe development to prevalence of electronic money, it will be more difficult topredict the movements of the money multiplier, and this could make it less relevantin controlling the money supply through high-powered money.
The second problem concerns the nature of the credit on the asset side ofelectronic money issuers. In the simple money multiplier analysis of Appendix, it is
implicitly assumed that there will be no distinction between the credit supplied bytraditional banks and credit supplied by the issuers of electronic money. However, itis certainly possible that there will be substantial differences between the two. Basedon the report published in June 1998 by the Financial System Research Council’s
Study Group on an Environment for Electronic Money and Electronic Payments, thegovernment is supposed to obligate segregated management of the funds backing
electronic money and the investment of the funds in safe, liquid assets. If theseregulations are actually imposed in the future, then it would be appropriate todistinguish between the assets of banks that lend to relatively high-risk clients,
including smaller businesses, and the assets held by electronic money issuers.
Therefore, we will need to closely observe the contents of the assets held by theissuers of electronic means of payment.
19. Our discussion here has stored-value products in mind in order to distinguish electronic money from conventional bank deposits. However, the discussion below would remain the same, even if access products not subject
to statutory reserve requirements were substituted for stored-value products.
20. For details, see the Appendix.
21. It is unrealistic to think that issuers of electronic money would hold absolutely no reserves because they need nothave statutory reserve requirements. As long as electronic money is a new kind of deposit, its issuers will holdreserves against payments and withdrawals. It is important that the issuers of electronic money will probably beable to save on their reserve holdings compared to traditional banks. This point becomes extremely important in
subsequent discussions of how high the money multiplier will rise.

14 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

Thirdly, the question is how far the money multiplier can rise. In an extreme casein which the money multiplier was able to rise virtually infinitely, there would begrave doubts that monetary policy could maintain its effectiveness. We therefore
analyzed in detail the potential for an infinite rise in the money multiplier as a resultof the broad spread of electronic means of payment.
2. Credit creation through the issue of electronic money
It is well known that, in the case of credit creation through conventional bankdeposits, the reserves supplied by the central bank function as an “anchor” for thecontrol of the money supply. When credit is created through the issue of electronicmoney, however, there will be no required reserve deposits to function as the anchor.
So there might be a concern that the electronic money issuer could continue toincrease lending and the money multiplier could reach infinity.22 The conclusion
reached at the forum on this issue was that it would be unlikely that electronicmoney issuers would continue to increase lending infinitely. There are four major
reasons for this conclusion.
First, as already described, even if electronic money were not subject to statutory
reserve requirements, it is highly likely that issuers would hold either cash or bankdeposits as reserves against payments and withdrawals. Though electronic money
issuers would certainly be able to save on their reserves compared to traditionalbanks, it is unrealistic that they would reduce them to absolutely nothing.
The second reason is the existence of “leakage.” Even assuming that issuers ofelectronic money could hold absolutely no reserves, it is unrealistic to think that in
the credit creation process through electronic money the funds would continue tocirculate forever among the electronic money issuers. The electronic money stock
received by people would at least in part be converted to cash and bank deposits andtherefore “leak out” of the electronic money issuers.
Third, the finite nature of lending demand should be noted. Even in the processof credit creation through electronic money there must be borrowers. And, obviously,electronic money issuers will not have unlimited opportunities to lend to “good”
borrowers. In other words, the lending demand curve the electronic money issuers
confront will be similar to the demand curve banks face: it will move downward to
the right against an interest rate and it will be finite.23
Finally, the costs incurred by electronic money issuers in supplying lending areimportant. When electronic money issuers make loans, they will incur administrative
costs just as traditional banks do currently. Therefore, the lending supply curve of theelectronic money issuers will be similar to the lending supply curve of banks: it is a
finite curve that rises to the right.

22. More specifically, there is a concern that even though real GDP is constrained by the potential GDP and cannot
rise beyond it, electronic money issuers could continue to increase lending infinitely and thereby cause inflation.
With traditional bank lendings and deposits, tight monetary policies can be implemented to prevent such asituation from occurring through the reserves supplied by the central bank function as an anchor (although there
is some dispute as to whether a central bank controls the volume of reserves or the call rate). But this is not thecase with electronic money.
23. For more details on this point see Tobin, J., “Commercial Banks and Creators of Money,” in D. Carson, ed.
Banking and Monetary Studies (Homewood: Irwin, 1963).

15

These ideas are certainly nothing new to electronic money. When Euro-deposits
emerged, Milton Friedman argued that the “Euro multiplier”24 would be extraordinarily high because Euro-deposits were not subject to statutory reserve requirements.
However, there seems now to be a consensus among academic economists that theEuro multiplier is not as big as was believed, because (1) Euro-deposits have an
extremely low redeposit rate (there is a large amount of “leakage” from Euro-banks),
and (2) Euro-banks have considerable domestic bank deposits as reserves against
payments and withdrawal.25 This is similar to the arguments presented above forelectronic money.
C. Electronic Payment Technology and the Money Demand Function
The previous section explained the impact of the development of electronic payment
technology on money supply. On the other hand, this section examines its impact onmoney demand.
1. The development of electronic payment technology and the money demand
function
As noted, money has three important functions: (1) a unit of account, (2) a medium
of exchange, and (3) a means of storing value. Electronic means of payment will
primarily provide the second function. Therefore, when considering the impact ofelectronic payment technology on money demand, it is appropriate to utilize amoney demand model based on transaction motives. According to the leading modelof this type, the Tobin-Baumol model, there is a positive correlation between the costof converting deposits into cash and the cash demand balance.26 The development ofelectronic payment technology will reduce the costs incurred in converting deposits
into cash,27 and therefore reduce the demand for cash stock. Intuitively, it would
seem that the reduction in the cost of traveling to and from the bank would make itpossible to convert from deposits to cash more frequently, and therefore reduce thebalance of non-interest-earning cash.
The Tobin-Baumol model considered here is merely a model of the demand for
cash (narrowly defined money), but it can be applied to a rather wider range offinancial assets. In other words, exactly the same argument could be made if therelationship between cash and deposits is replaced by the relationship between
broadly defined money (cash and deposits) and nonmonetary financial assets (bonds
and stocks). Advances in information technology, although they do not merely meanelectronic payment technology, would conceivably reduce the cost of converting
24. Assuming the domestic bank deposits held by Euro-banks to be reserves, the Euro multiplier equals theEuro-deposit balance divided by reserves.
25. Several empirical studies show the Euro multiplier to be a relatively low 1.05–1.21. For more details, see, forexample, Niehans, J., International Monetary Economics (Johns Hopkins University Press, 1984), Chapter 9.
26. See Baumol, W., “The Transactions Demand for Cash: An Inventory Theoretic Approach,” Quarterly Journal of
Economics, 67 (4), November 1952, pp. 545–556, and Tobin, J., “The Interest Elasticity of Transactions
Demand for Cash,” Review of Economics and Statistics, 38 (3), August 1956, pp. 241–247, for an explanation of
the Tobin-Baumol model.
27. It is easy to understand this if one imagines an electronic means of payment that allows one to access one’s
deposit account through the Internet from a personal computer at home and download monetary value into an
IC card on hand. One would be spared the trouble of going to and from the bank, and unlike the withdrawal ofbank notes from an ATM, one need not carry a bulging wallet home. Therefore, both handling and security costsof electronic means of payment would be simultaneously reduced.

16 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

between these assets and broadly defined money, so demand for broadly definedmoney would also decline. Either way, a money demand model based on transaction
motives indicates that the spread of electronic payment technology will enable
users to save their money demand balances.
2. Monetary policy targets under the circumstances of the development ofelectronic payment technology
The report has so far examined the impact of electronic payment technology on
the money supply and money demand at the macro level. In addition, it must
be considered whether central banks will be able to accurately observe the shifts inthe money multiplier and money demand function that will occur in the process ofthe development of electronic payment technology. It is probably appropriate toassume that, during this process, shifts of both the money multiplier and the money
demand function will occur as “unexpected” shocks by the central bank.28 If this isindeed the case, then the following question needs to be answered: What target
should a central bank choose to stabilize the macroeconomy during the process ofdevelopment of electronic payment technology in which unexpected financial
shocks occur frequently?
Macroeconomics has already provided a clear answer to this question. Poole(1970)29 uses an IS-LM model to develop the following argument. If the major factor
in an economic fluctuation is a real (IS) shock, then stabilization of the money
supply will be a better policy to minimize the amplitude of real GDP fluctuation
than the stabilization of interest rates. Conversely, if a portfolio (LM) shock, forexample, a shift of the money demand function, is greater, then stabilization ofinterest rates will be more effective than stabilization of the money supply in
reducing the fluctuation of real GDP. Based on Poole’s analysis, therefore, if
unexpected shocks to the money multiplier and money demand function due
to the development of electronic payment technology occur frequently, then it
will be desirable to choose interest rate stabilization policies.30

28. This tendency toward financial instability such as the shift of the money demand function does not become
apparent until the emergence of electronic payment technology. Many academic economists and central bankers
have argued that advances in financial innovations and deregulation in the 1980s destabilized money demand
functions in the developed countries.
29. See Poole, W., “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model,”Quarterly Journal of Economics, 84 (2), May 1970, pp. 197–216.
30. In a different context from Poole, M. Woodford’s paper, “Doing without Money: Controlling Inflation in a
Post-Monetary World” (NBER Working Paper No. 6188, 1997) provides a model showing that even whentechnological advances have reduced the demand for money to near zero, the central bank will still be able toconsistently control the inflation rate using interest rate policies.

17Box 1 The Spread of Mutual Funds in the United States and Its Impact
on Monetary Aggregates
As has already been noted, the report by the Financial System ResearchCouncil’s Study Group on an Environment for Electronic Money andElectronic Payments suggests the possibility of obligating the issuers ofstored-value products (electronic money) to invest the money backing these
instruments in safe, liquid assets—for example, government bonds and assetsof similar quality. Given the fact that the asset side of electronic money issuers
will be invested in bonds rather than traditional bank lending, the spread ofelectronic money can be expected to have an effect similar to the spreadof MMF accounts and other mutual funds.31 In order to consider the effect of
the spread of electronic money on monetary aggregates, let us introduce thepaper presented at the forum by Itoh, Kawamoto, and Taniguchi (1999),
which analyzes the effect of the spread of mutual funds on money supply in
the United States.
Between 1990 and 1993, the U.S. Federal Reserve Board (FRB) eased thestance of monetary policy continuously, but the M2 growth rate failed toincrease while the bond and stock mutual funds held by the household sector
grew at a historically high rate. This phenomenon led many economists,
especially those at the Federal Reserve banks, to attempt to estimate broadly
defined monetary aggregates that included bond and stock mutual funds.
They have carried out many empirical studies to investigate whether suchaggregates could be used in place of existing M2.32 Below are some of the mostnotable findings.
First, the relationship between the broad monetary aggregates including
mutual funds and the real economy is crucial for the FRB. For example,
Orphanides, Reid, and Small (1994) create a broadly defined monetary
aggregate that includes bond and stock mutual funds, but their empirical testshows that it is not necessarily superior to existing M2 as a leading indicator of
nominal GDP in the 1990s.
Second, the question of how to include foreign-currency assets in broadmonetary aggregates should be noted. While the money supply statistics
are currently denominated entirely in U.S. dollars, among the most rapidly
growing funds in the 1990s were those invested in foreign-currency

31. Some forum members were of the opinion that the electronic money in the report of the Financial System
Research Council’s Study Group on an Environment for Electronic Money and Electronic Payments was
virtually considered “MMF accounts with payment functions,” and that whether the instruments were electronic
or not was not an essential issue in the report.
32. As is well known, MMF accounts emerged in the 1970s when deposit ceiling rates were regulated by Regulation
Q. Because of high inflation rates and high money market rates caused by the FRB’s tightening, MMFs rapidly
became an attractive substitute to bank deposits. Thus, personal MMF accounts were added to M2 when the
FRB reviewed monetary aggregates in 1980. We should draw attention to the fact that, in the 1990s, theargument is whether to include mutual funds excluding MMF accounts in the component assets of M2.
We would also note that the Bank of Japan (BOJ) does not at present include any investment trusts (or MMFs)
as component assets of M2.

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Forum on the Development of Electronic Payment Technologies

denominated assets. This raises previously unexplored issues such as how tohandle foreign exchange rates when creating monetary aggregates that include
mutual funds.
The third question is whether the principal of the assets constituting
monetary aggregates is guaranteed. Current M2 includes only safe assets forwhich the principal is guaranteed (i.e., assets whose prices do not change
according to market interest rate levels). However, the prices of bond andstock mutual funds vary greatly as a result of the capital gains and capital losses
brought about by interest rate movements. The appropriate estimation of themonetary aggregates that include these mutual funds is far more difficult thanthat of existing M2 (Collins and Edwards [1994]).
Finally, Itoh, Kawamoto, and Taniguchi (1999) raised the issue of“moneyness.”33 Though bond and stock mutual funds are used as a meansof payment, their low turnover rates (defined as the ratio of total payment
amounts to assets on balance) indicate that they have far less “moneyness”
than existing bank deposits. Therefore, it may not be rational to include themin M2 with the same treatment as component assets of current M2. One
proposal for overcoming this problem is to switch from the current simple
arithmetical aggregation to a weighted aggregation (weighted for themoneyness of the financial asset).34
Ratio of MMF Assets to M1 and M2 in the United States
Percent
80
70
60
50

MMF/M1

40
30
MMF/M220
1001973 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

33. Generally, “moneyness” means the degree to which a financial asset serves as a medium of exchange.
34. Feldstein and Stock (1994) is one such attempt.

19References

Collins, S., and C. L. Edwards, “An Alternative Monetary Aggregate: M2 Plus Household
Holding of Bond and Equity Mutual Funds,” paper presented at the Federal Reserve Bankof Saint Louis Symposium on Mutual Funds and Monetary Aggregates, March 1994.
Feldstein, M., and J. Stock, “Measuring Money Growth When Financial Markets Are
Changing,” NBER Working Paper No. 4888, 1994.
Itoh, M., T. Kawamoto, and F. Taniguchi, “MMFs and Electronic Money,” IMES Discussion
Paper Series No. 99-J-21, Institute for Monetary and Economic Studies, Bank of Japan,
1999 (in Japanese).
Orphanides, A., B. Reid, and D.H. Small, “The Empirical Properties of a Monetary Aggregate
That Adds Bond and Stock Funds to M2,” paper presented at the Federal Reserve Bank ofSaint Louis Symposium on Mutual Funds and Monetary Aggregates, March 1994.

Box 2 The Spread of Credit Cards and Monetary Policy
As already noted, when purchasing commodities through the Internet by
credit card, one will have only to input the credit card number and expiration
date. The development of access technologies, therefore, will probably makecredit cards even more convenient than before. In this box, we examine how
the spread of credit cards (the increase in the outstanding balance of credit
card loans and in the volume of settlements by credit card) owing to thedevelopment of access technologies will affect monetary policy, following Ito,
Kawamoto, and Taniguchi (1999).
The most important characteristic of credit cards that is significantly
different from other means of payment is that they allow credit card holders
free and unsecured borrowing within a preset credit limit. This can lead
consumers to mitigate liquidity constraints.35 Generally, if some economic
agents are under liquidity constraints, monetary policy could affect theirintertemporal allocation of resources, by tightening or easing liquidity (this iscalled the “availability channel”). However, the widespread use of credit
cards may mitigate liquidity constraints of consumers to the point that thisavailability channel would lose its effectiveness.
The situation in the United States in the early 1980s provides a good casestudy of the degree to which the effect of credit cards on consumers’ liquidity
constraints is important. Partly because of the second oil crisis, high inflation
rates beginning in the late 1970s had persisted into the early 1980s in the UnitedStates. In March 1980, President Carter gave the FRB special authority to
implement credit controls in order to overcome the inflation. With the strong
leadership of then-Chairman Volcker, the FRB imposed a special 15 percent
reserve requirement on credit card lending, along with an array of other
35. As is well known, the existence of liquidity constraints tends to push national savings rates higher. According
to empirical analyses using cross-country data, the national savings rates in countries in which consumers can

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Forum on the Development of Electronic Payment Technologies

draconian regulations to restrict consumer credit. The effect was enough tosharply curtail consumer credit card borrowing. During the April–June quarterof 1980, consumer spending declined by 9.8 percent in annualized terms fromthe previous quarter (for durable goods, the decline was 43.2 percent). This was
the sharpest quarterly decline in the postwar period36 (see the figure below).
Later, in July and subsequent months, credit controls were gradually phasedout and consumption recovered. This experience can be interpreted as evidence
that credit cards do indeed play a significant role in mitigating consumers’liquidity constraints.
Another important feature of credit cards is that they can concentrate
payments at a prearranged time. This reduces the uncertainties involved in
making payments and has the effect of reducing the precautionary demand formoney. If the central bank accommodates this decline in money demand, thenincome velocity rises. In fact, in the late 1980s in Switzerland, where both
debit cards and credit cards had become widespread, the income velocity ofnarrow money (base money and M1) rose markedly (see the figure below).
Credit Card Loan and Retail Sales in the United States, Late 1970s/Early 1980s
25

Percent

Percent
Annual growth in credit
card loans outstanding(left scale)

20

20

15

15
10
10
5
0

Annual growth inretail sales (right scale)

50Mar. 1980: President
Carter’s consumer
credit controls–5Jan. 1978 Apr. 78 July 78 Oct. 78 Jan. 79 Apr. 79 July 79 Oct. 79 Jan. 80 Apr. 80 July 80 Oct. 80–5sufficiently make use of borrowings via credit cards are significantly lower than in countries where consumer
credits are not readily available. (See, for example, Jappelli and Pagano [1994].) Obviously, credit cards will easeconsumers’ liquidity constraints, but in Japan the percentage of revolving payments is not so high, and the credit
period is relatively short, so some members of the forum argued that in fact credit cards only played a role ofsmoothing seasonality out.
36. Obviously, other factors besides the FRB liquidity controls caused consumption to sharply drop—for example,
the decline in consumers’ net incomes as a result of the recession.

21

Swiss Income Velocities of Narrow Money
11
10
9
Nominal GDP/base money
8
7
6
5
4
1980 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

5.0

4.5

Nominal GDP/M1

4.0

3.5

3.0

2.5
1980 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

References

Ito, T., T. Kawamoto, and F. Taniguchi, “Credit Cards and Electronic Money,” IMES
Discussion Paper Series No. 99-J-16, Institute for Monetary and Economic Studies, Bankof Japan, 1999 (in Japanese).
Jappelli, T., and M. Pagano, “Saving, Growth, and Liquidity Constraints,” Quarterly Journal of
Economics, 109, 1994, pp. 83–109.

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Forum on the Development of Electronic Payment Technologies

D. The Development in Electronic Payment Technologies and the Impact onMarket Operation and the Reserve Requirement System
The money multiplier formula that describes the relationship between the money
supply and high-powered money is an identity equation, so it always holds true.
However, the money multiplier only represents a predefined, accounting relationshipand cannot necessarily show causality from high-powered money to money supply.
According to the textbook theory of bank behavior, the most important factor
determining the movement of the money supply is the extension of credit by banks
and other private financial institutions.37,38 To take up bank lending as an example ofbank credit extensions, the bank will decide how much to lend so as to maximize its
own profits. The variable that influences the bank’s profits is the difference (spread)between the lending interest rate and the call rate. In other words, a rise in the callrate, which is the cost of lending to the bank, will decrease the amount of banklending. The converse is also true. In either case, in this model, once the amount oflending is determined, the amount of deposits and also the money supply will
be determined as well.39 At the same time, the amount of reserves required will
also be determined, so the demand for high-powered money will be determined inconjunction with the demand for cash. At each point in time, the central bank mustmeet the demand for high-powered money in order to avoid turmoil in the financial
markets. However, the central bank can also set the level of the call rate at which
private banks lend reserves to each other by the way in which it supplies highpowered money. Ordinarily, the call rate will have a substantial impact on the lending
activities of private financial institutions, so the central bank is ultimately able tohave an impact on the money supply as well, according to this kind of model.
In practice, Japan and most other countries use short-term interest rates(money market rate for overnight loans) to pursue monetary policy (during ordinary
times) as control variables. We therefore need to consider what impact the spread ofelectronic payment technology will have on the central bank’s ability to influenceshort-term interest rates, and what kinds of policy, including the potential need formodifications to the reserve requirement system, should be implemented. In order totackle these questions, it will be important to elucidate beforehand the impact thatelectronic payment technology will have on (1) the demand for reserves at financial
institutions, and (2) the ability of the central bank to supply reserves.
1. Impact on the demand for reserves
If electronic means of payment are merely a substitute for cash, then their effect onmarket operation will be comparatively slight. That is because central banks, inpractice, passively satisfy the demand for cash, and market operation is conducted
to influence the level of the reserve. On the other hand, the spread of electronic
payment technologies will promote a shift away from the deposits that are subject to

37. Extension of credit in this context includes bank purchases of bonds and equities as well as ordinary lending.
38. No matter how many transfers there are between personal deposits, from a macro standpoint it is just a transfer.
If there are no extensions of credit by the banking sector, then there is no change in the total amount of deposits.
39. Other factors in addition to lending that would change the money supply are rather technical in nature and havethus been omitted from this discussion.

23

the current reserve requirement system to electronic means of payment that are notsubject to such a requirement. The demand for reserves is therefore likely to decline.
However, what is important in a central bank’s control over short-term interest
rates is not the size of reserve demand in absolute terms but that the demand
for reserves be stable and predictable. Even when required reserves are at zero, it ispossible to control short-term interest rates as long as financial institutions need tohold stable balances in their accounts with the central bank in order to effect final
payment. This is justified by the experiences of central banks in Canada and othercountries. Therefore, even after electronic payment technologies that substitute fordeposits have spread, what will be ultimately important is whether final payments
among private financial institutions, including the issuers of electronic money, areconducted stably through their current accounts with the central bank. This is aquestion that needs to be examined more broadly, including the influence that the
spread of electronic payment technologies will have on the existing bank-oriented
payment systems centered around central banks.
2. Impact on the supply of reserves
The impact on the supply of reserves will to a great extent depend on how the spreadof electronic payment technologies affects the balance sheets of central banks. Cash is
the largest liability item for a central bank. So if electronic means of payment
are broadly used as substitutes for cash, then it is highly likely that a central bank’sbalance sheet will shrink substantially.40 The question is how far its balance sheetneeds to shrink before it begins to serve as a constraint on the central bank’s ability
to supply reserves. For example, in everyday open market operations, whose scale isrelatively small, even a fairly small central bank’s balance sheet would not be thatmuch of an impediment, but if for some reason the central bank needed to engage inoperations to absorb a large amount of reserves,41 it would not have enough salable
assets and therefore would be potentially unable to achieve its expected objectives(the BIS [1996]).42
3. What kind of policies should be adopted?
Several policies were proposed at the forum to solve the market operation issues
posed by the spread of electronic payment technologies.
The first proposal would be to impose reserve requirements on all payment-styled
financial instruments including electronic means of payment, and to set the same
reserve ratios for all of them.43 This policy can be expected to maintain stable reserve
demand of private financial institutions. In addition, because all payment-styled
financial instruments would be subject to the same reserve ratio, the distortions toresource allocation derived from the reserve system would be minimized, and fairness
would be ensured for financial institutions offering payment service. We should also

40. See Section III.E for the effect that the contraction of the central bank’s balance sheet will have on seigniorage
revenue.
41. For example, there could be operations for the purpose of neutralizing intervention to purchase foreign currency
on the foreign exchange markets.
42. Some members of the forum pointed out that the sales of commercial bills currently engaged in by the Bank ofJapan could be used for these sorts of problems.
43. A more practical issue is the difficulty in specification of payment-oriented financial products.

24 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

note that it is worth considering the payment of interest on reserves to eliminate inadvance any incentive for private financial institutions to avoid reserve burdens.44
The second proposal is to reduce the reserve ratio for all financial instruments tozero (move to a zero reserve regime). In other words, as long as there continues to bestable demand for payments through central bank current accounts even after the
spread of electronic payment technologies,45 market operation will still be effective
even with reserve ratios dropped to zero. Zero reserve ratios would also potentiallyminimize the disadvantages from the reserve requirements.
The third proposal is for the central bank itself to issue electronic money. There is
deep-rooted opposition to this. Opponents argue that it would constrain competition
among financial institutions and therefore reduce the incentives to private-sector
innovation in electronic payment technologies.46 It is also uncertain how much
impact the central bank would have on the spread of private electronic money even if
it were to enter the electronic money business. Forum members differed on whether
the current general acceptance of Bank of Japan notes stemmed from the fact thatthey are legal tender, “esthetic” reasons related to their form and feel, or the spreadof ATMs. If it is only because ATMs are readily available, then this is merely atechnology problem. If esthetic issues are involved, then the problems become more
complex. In either case, it may be technically feasible for the central bank to issue
electronic money, but the pros and cons require careful consideration.
E. The Impact of Electronic Payment Technology on Central Bank Seigniorage
1. The development of electronic payment technology and central bankseigniorage
The term “central bank seigniorage” often causes confusion because it is used invarious senses. We therefore begin by defining it.
In economics textbooks, seigniorage ordinarily means “inflation tax,” which isdefined as the quantity of real purchases per unit time that the government
finances from additional issue of money. That is, it equals the increase in nominal
high-powered money stock per unit time (∆H ) divided by the current price level(P ). This can also be expressed as the rate of increase in nominal high-poweredmoney stock (∆H/H ) multiplied by the real high-powered money balance (H /P ).
For the sake of convenience, we will refer to this as narrowly defined seigniorage. By
definition, narrowly defined seigniorage can only take place for agents that are able tocause inflation by increasing their own liabilities. Therefore, these agents should be
confined to the government and central bank.47
44. There is some concern that when market interest rates are paid on reserve deposit balances and interest is also
paid on the TBs and FBs used in operations, even the market operation to exchange reserve deposits for TBs and
FBs and vice versa may not be able to influence interest rates and money (think, for example, of a Tobin-styled
general equilibrium model of asset markets). But some members of the forum argued that even if interest
were paid on high-powered money, it would be unrealistic to think that other financial assets would be fully
substitutable for it.
45. In order to produce stable demand for payments through central bank current accounts, it may be necessary forsome sort of legal compulsion that requires issuers of electronic means of payment to make final settlement
though central bank current accounts.
46. See, for example, the BIS (1996).
47. Strictly speaking, the reason why narrowly defined seigniorage is called an inflation tax is because the rate ofincrease in high-powered money stock (∆H/H ) is, in the long run, equal to the inflation rate (∆P/P ). For a more25

In the actual balance sheet of a central bank, the liabilities side generally is madeup of banknotes issued at zero interest, while the assets side consists of interestbearing securities, for example, government bonds. Therefore, the central bank could
gain profit from the difference between asset and liability interest rates. This sort ofprofit is one of the central bank’s major sources of income, and it is often regarded as
the component of broadly defined seigniorage. However, the profit arising from thedifference between asset and liability interest rates does not accrue only at the central
bank. Obviously, private banks can also earn it. Therefore, it is extremely important
to distinguish between narrowly defined seigniorage and broadly defined seigniorage
when discussing the impact of the spread of electronic payment technologies on
central bank profit.
If stored-value products are largely substituted for cash, then the central bank’sbalance sheet will contract and therefore the central bank’s profit arising from thedifference between these interest rates will decrease. However, as stated by the BIS(1996), these profits are usually far larger than the central bank’s running expenses, soeven a substantial decrease in profit is unlikely to put the central bank in a situationin which it is unable to cover its costs.48,49
Certainly, the profit arising from the difference between the interest rates on assets
and liabilities will be transferred from the central bank to the issuers of electronicmoney, but this does not at all mean that electronic money issuers will gain narrowly
defined seigniorage. As discussed in Section III.A, even electronic money that is
highly substitutable for cash will not become inconvertible money (by itself it will
not have finality), and therefore it can be considered a deposit. Putting it differently,
electronic money issuers will not be able to increase their own liabilities on their own
and cause inflation for the economy as a whole. Therefore, just as traditional privatebanks do not gain narrowly defined seigniorage, neither will electronic money issuers.
Traditional banks and electronic money issuers will merely earn their profits arisingfrom the difference between the interest rates on assets and liabilities, according to
the size of their balance sheets.
2. Could electronic money be inconvertible money?
Is there any possibility that electronic money could circulate as an inconvertible
money? In general, the issuers of electronic money can be regarded as private firmsthat behave so as to maximize their profits. It should be noted that as long aselectronic money issuers behave in this way, they will always have incentives tocause “dynamic inconsistencies.” In other words, they may try to gain the trust of
the public by announcing how much electronic money they will issue, but will havean incentive to break their word and increase the amount of electronic money theydetailed discussion of this point, see, for example, O. Blanchard and S. Fisher, Lectures on Macroeconomics, MIT
Press, 1989, pp. 195–201.
48. According to the BIS (1996), the profit of the Bank of Japan in 1994 was equivalent to 0.42 percent of GDP,
while the Bank’s current expenses were only 0.06 percent. Therefore, the percentage reduction of cash balancethat would bring the profit down to the breakeven point (the percentage of cash balance to be reduced in order tomake the profit equal to the current expense) is equivalent to 85 percent.
49. According to the BIS (1996), if central banks were unable to cover expenses by (broadly defined) seigniorage
and therefore became fiscally dependent on the government, their fiscal independence of monetary policy
implementation might be impaired.

26 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

issue, so as to earn more profits. In this case, electronic money issuers should be
regarded as economic agents incapable of “commitment.” Therefore, it is extremely
unlikely that private issuers of electronic money could circulate their liabilities asinconvertible money and benefit from narrowly defined seigniorage.
The above theoretical discussion suggests that it would be generally impossible
for economic agents other than the government and central bank to circulate their
liabilities as inconvertible money. This conclusion may not always be correct,
however. In fact, there are some historical cases where private agents were able tosucceed in committing so that they could circulate inconvertible money. Probably
the most famous example is the money of Yap Island.50 Another example is Yamada
hagaki in Japan.51 Both are examples of currencies created voluntarily by the private
sector rather than the government.52 In particular, the Yamada hagaki , Japan’s oldest
paper money, was able to maintain a stable value for a prolonged period of time.
It was not backed by regional government authority, such as the feudal clan (han).
There are three conditions that must be met before something achieves
widespread use as money. First, it must be sufficiently durable. Second, it must be ofeven, consistent quality. And third, it must be divisible. Money with these features
has, over the centuries, evolved from gold ore to gold coin, and then on to paper
money. But there was no clear consensus among the forum members on whether
currency would shift from “paper” to “electrons,” and whether this electronic money
had the possibility of circulating as inconvertible money, so further consideration ofthese questions is required.

50. The Pacific island of Yap circulated some kind of intermediate between goods and inconvertible money. The
traditional means of payment was called the fei, a large, rounded stone with a hole through its center, throughwhich a rod was inserted for transportation. The stones were used as a means of exchange. However, the costs
incurred in carrying large stones were so great that the islanders began to use claims against the stone currency as
their money. Even if a storm blew such a stone into the ocean and it could not be recovered, the claim against thestone continued to be valid for exchange.
51. The oldest paper money to have circulated in Japan, originating in the Ise Yamada region (modern-day Ise Cityin Mie Prefecture), the Yamada hagaki was a private bill issued in lieu of change as a deposit (bill) of small
amounts of silver coins used as a unit of account. Hagaki means “a writing of odd amounts.” The issuers werepriests serving at the shrine at Ise, and this self-governing organization set up an issuing system that achieved
a high degree of trust and confidence among the people of the Yamada region, so that the bills were fairly
widely circulated.
52. Some members of the forum noted that, since the establishment of modern central banks, there had been nowidespread use of inconvertible money issued by private agents, at least not in peacetime.

27

Box 3 The Payment System Using Government Bond Investment Trusts
and the Potential for Electronic Payment Technology“Payment” is the conduct of transferring assets among the parties concerned,
to settle the credit/liability relationship generated by transactions of goods,
services, and assets. Theoretically, the assets transferred should not be confined
to cash or deposits. As long as any asset or its ownership other than cash or
deposits is generally acceptable, then it is quite possible to settle transactions
by the asset. Itoh, Kawamoto, and Taniguchi (1999) (a paper prepared for theseventh meeting of the forum) discuss the payment system that would use notcash or deposits but government bond trusts, following Itoh and Yanagawa(1991).53 The summary of this paper is as follows.
Like a normal investment trust, the function of financial institutions
discussed here would be to purchase government bonds on behalf ofcustomers, hold them in custody, and provide the customers with passbooks
noting ownership. For example, assume that both Consumer A and Shop B
have government bond fund accounts. When Consumer A purchases a good at
Shop B, settlement can be completed with a transfer from the account of A tothat of B. That is, the government bond fund balance of Consumer A would
be reduced by the price of the good, and the balance of Shop B would
be increased by the same amount. Thus, the above payment system using
government bond investment trusts could provide virtually identical payment
services to those now provided by bank deposits.54
However, there are some differences between a payment system based on
government bond investment trusts and a system based on bank deposits. The
biggest difference from the perspective of monetary policy is whether or notthere would exist demand for high-powered money to finalize settlements. As
is well known, payments with bank deposits are finalized by transfers between
the current accounts that individual banks hold at the central bank. This
process necessarily generates some demand for high-powered money to finalize
payments, and therefore enables the central bank to control the money stockby supplying reserves (regardless of whether central bank controls the volumeof high-powered money or controls short-term interest rates). On the other
hand, in a payment system that uses government bond investment trusts, theparties concerned, including financial institutions, complete payments bytransferring (the ownership of ) government bonds without incurring
credit risks. In this case, there is absolutely no demand for high-poweredmoney to complete payment. It is therefore likely that monetary policy
through supplying reserves would lose its effectiveness.55
53. It should be noted that the government bond trust-based payment system discussed here is merely hypothetical innature. It is another question whether such a system would be feasible from a business standpoint.
54. Note that the payment services currently supplied by MMFs merely play a role of easily converting from the accountto cash and deposits. They by no means transfer ownership of government bonds among holders directly.
55. Assuming that all payments were conducted by transfers of government bond accounts, the money supply would
be determined by the volume of government bond stock and would therefore be beyond the central bank’s control.
In such cases, it would be fiscal policy rather than monetary policy that determined the long-term price level.

28 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

According to Wallace (1983), there are two main reasons why government
bonds themselves and government bond investment trusts are not used asmeans of payment. The first is the existence of legal restrictions preventing thedirect transfer of government bonds and the issue of private banknotes backed
by government bonds. The second is that the units in which government
bonds are issued are too large to settle small unit accounts. But Itoh,
Kawamoto, and Taniguchi (1999) provide no clear answer on whether agovernment bond investment trust-based payment system like the one
described above could actually emerge, when all legal restrictions are removed
and electronic payment technologies have developed56 to enable transfer of asmall amount of government bonds.
References

Itoh, M., and N. Yanagawa, “The Functions of Money and Payment Systems,” Mita Gakkai
Zasshi, 84 (2), 1991 (in Japanese).
———, T. Kawamoto, and F. Taniguchi, “MMFs and Electronic Money,” IMES Discussion
Paper Series No. 99-J-21, Institute for Monetary and Economic Studies, Bank of Japan,
1999 (in Japanese).
Makinen, G., and T. Woodward, “Some Anecdotal Evidence Relating to the Legal Restrictions
Theory of the Demand for Money,” Journal of Political Economy, 94 (2), 1986,
pp. 260–265.
Wallace, N., “A Legal Restrictions Theory of the Demand for Money and the Role of Monetary
Policy,” Quarterly Review, Federal Reserve Bank of Minneapolis, 1983, pp. 1–7.

IV. Electronic Payment Technology and Cross-Border
Transactions
It is sometimes pointed out that an electronic means of payment completes
settlement just by exchanging electronic data and might therefore be expected toincrease cross-border electronic commerce and encourage domestic holdings and useof foreign currencies. This chapter covers the above possibilities and their likely effecton monetary policy. Discussions in this chapter are organized depending on the
motivations for holding foreign currencies (as a medium of exchange or as a meansof storing value).
A. Possibilities of Promotion of Cross-Border Electronic Commerce and Use of
Foreign Currencies by Electronic Payment Technology
1. Use of foreign currencies for transactional purposes
The development of electronic payment technologies that enable credit card numbers
to be transmitted securely from Internet web sites has reduced the transaction costs
56. Historically, there are records that the relatively small-denomination (US$50) government bonds called Liberty
Bonds issued in the United States during World War I circulated as currency (see Wallace [1983]). Also see
Makinen and Woodward (1986) for a view opposite to Wallace’s.

29

for electronic commerce and is therefore expected to encourage the spread ofelectronic commerce. In addition, electronic commerce is not, by nature, subject
to spatial constraints and therefore is unlikely to be limited exclusively to domestictransactions. Thus, cross-border electronic commerce can be expected to grow.
As discussed in Section II.C, transactions in digital goods, in particular, do not
require the shipment of the product by sea or air, so the incentives for cross-borderelectronic commerce (exports/imports) are expected to be particularly large in thisarea. Therefore, it is highly likely that the development of electronic payment
technologies can encourage electronic commerce and that this, in conjunction withthe liberalization of foreign exchange controls and other factors, can lead to greater
cross-border commercial transactions.
If volumes of cross-border electronic commerce transactions continue to increase
for a prolonged period of time so that the degree of dependence on foreign traderises, the advantages in using a common currency will increase. In other words, as
cross-border transactions begin to account for a larger proportion of the business of acompany, it will be more exposed to foreign exchange risks when converting between
foreign currencies and its domestic currency, and therefore have an incentive to
reduce those risks by retaining the foreign currency it receives and using it for
payments without converting back to its domestic currency. In point of fact, since
Japan liberalized its foreign exchange controls, there have been cases of transactions
even between domestic companies being settled in surplus foreign currencies fromexport/import operations as a means of reducing foreign exchange risks.
One of the points made at the forum was that if the spread of cross-borderelectronic commerce integrates markets (goods, markets, financial markets, labormarkets,57 and so on) among countries with strong trading relationships, then it
may not always be desirable to employ floating exchange rates based on individual
currencies. There will be greater advantages to using a common currency for
payments. In other words, there may be changes in the optimum currency area.
From a historical perspective, foreign currencies have only been used for domestic
payments in cases in which there is a loss of confidence in the domestic currency—
for example, because of hyperinflation. Some members of the forum were thereforeof the opinion that the development of electronic payment technologies would havelittle real effect in encouraging foreign currency payments. Forum members also
differed on what kinds of currencies would be used in cyberspace, and on whether
there might be different optimal currencies for digital goods just as there are forordinary goods, although the geographical conditions in optimal currency area theory
would not apply in this case.
2. Use of foreign currencies as a means of store of value
There are few financial institutions in Japan (particularly in local regions) that provide
foreign currency financial assets and, compared to domestic currency assets, those assets
lack variety. But the development of electronic payment technologies might enablewidespread use of Internet banking, which will increase the opportunities to access
57. Even in the labor market, which is generally thought to have low mobility, intellectual work can cross borders—for example, reports transmitted over the Internet, or teleconferencing.

30 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies

foreign-currency denominated financial assets (including those provided by foreign
financial institutions) and reduce transaction costs, which might encourage theJapanese public to hold more foreign-currency denominated assets. Obviously,
however, the spread and development of electronic means of payment and electroniccommerce will be only one factor in this. Some European countries have more than
5 percent of broadly defined liquidity in foreign-currency denominated deposits.
The main factor in this was the liberalization of capital movements within the region.
B. The Impact on Monetary Policy Administration of Greater Use of Foreign
Currencies
In this section, we assume that, in part because of the impact of electronic payment
technologies, there is greater use of foreign currencies, and we discuss the influencethat this would have on monetary policy.58
1. Use of foreign currencies as a medium of exchange
Widespread use of foreign currencies for domestic transactions would not change thecentral bank’s ability to control short-term interest rates in the domestic currency,
which is the operational target of monetary policy. This is because the control ofdomestic-currency short-term interest rates depends on the control of the supply ofbase money in the domestic currency. However, if a portion of domestic economic
activities were settled in foreign currencies, domestic-currency short-term interest
rates would have relatively less impact on the real economy.
An increase in foreign currency payments would probably be accompanied by anincrease in foreign-currency bank lending, but monetary policy cannot influencebank lending in foreign currency. Therefore, it can be pointed out that thetransmission mechanism of monetary policy through the credit channel would havebecome relatively weak.
In addition, when foreign currencies are widely used as a medium of exchange,
a central bank may lose its autonomy in conducting monetary policy because it
would have to follow the monetary policy of the country issuing the foreign currency
used domestically.
2. Use of foreign currencies as a means of store of value
When foreign currencies are widely used as a means of storing value, then, as
described above, the central bank will not lose its ability to influence domestic
short-term interest rates. However, the wide use of foreign currencies mightstrengthen the arbitrage between domestic and foreign long-term real interest rates.59
It is therefore possible that domestic short-term interest rates would have lessinfluence over long-term real interest rates. This is not a change specific to the spreadof electronic means of payment. It is merely an extension of trends seen in theprocess of globalization of financial markets.

58. This section covers the impact on monetary policy in a situation when foreign currency has achieved widespreaduse, not the process in which its use spreads.
59. This would increase the substitutability of domestic and foreign profit-making assets, and reduce the risk
premium demanded for uncovered foreign currency assets.

31

Greater use of foreign currencies as a store of value will also mean that
capital markets are more open and global. It is pointed out that central banks will
be increasingly unable to simultaneously pursue both domestic targets, such as
domestic prices, and fixed foreign exchange rates in their monetary policy.60

V. Future Tasks
The discussions at the forum focused on the development of electronic payment
technology and its effect on monetary policy. The preliminary conclusion of theforum is as follows. For the foreseeable future, electronic payment technology
will not raise new issues for monetary policy that are very different from thoseraised by previous financial innovations, but in the long run they might
substantially change financial and economic structures. In other words, froma longer-term perspective, technological innovations such as electronic payment
technology may not only lower transaction costs or make payments more efficient,but also significantly impact the organization of the financial industry, payment
systems, and the real economy. We would like to conclude this report by outliningsome of the issues that the forum will need to consider further in the future.
The first task is to consider the various changes that will occur in the transmission
mechanism of monetary policy as a whole, due to electronic payment and othertechnological advances. For example, this report focuses on a theoretical analysis of
the impact of the development of electronic payment technology on the money
supply, but in order to associate this analysis with actual monetary policy implementation, the forum will need more comprehensive analyses that include some solutionof the statistical problems. In other words, the forum will need to research further
how to change the statistics of monetary aggregates in the process of the spread of theelectronic payment technology, so that monetary aggregates could retain theirreliability as statistics and their effectiveness as information variables. Obviously,
technological advances influence more than just the money supply. As already noted,
the development of electronic payment technology should be regarded as a part ofthe broader spectrum of technical change. For example, technological advances will
have an effect on price level, which is the goal of monetary policy. The forum willneed to comprehensively consider ways of enhancing useful statistics, needless to say
including monetary aggregates and price indices, and creating an environment thatenables a central bank to use financial market information efficiently.
The second important task is to consider what kinds of structural changes will beseen in the organization of the banking industry and in payment systems as a resultof the development of technological innovations. Monetary policy (its effectivenessand the transmission mechanism) is supposed to be highly dependent on the current
organization of the banking industry and payment systems. Therefore, it is highly
probable that any changes in the banking industry’s organization and payment
60. See Okina, K., M. Shirakawa, and S. Shiratsuka, “Financial Market Globalization: Present and Future,”
Monetary and Economic Studies, 17 (3), Institute for Monetary and Economic Studies, Bank of Japan, 1999.

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Forum on the Development of Electronic Payment Technologies

systems caused by technological advances could significantly influence monetary
policy implementation. For example, if, as is predicted, technological advances resultin the emergence of a large number of new financial institutions providing services
that are highly substitutable for those provided by traditional banks, then this willchange the role of traditional banks in the effectiveness and transmission mechanismof monetary policy. It is especially intriguing to consider how central banks will needto respond to traditional banking collapses.
The third issue left to be tackled is the potential for electronic payment and othertechnological advances to undermine the “borders” between currency areas. As themedia of communication and memory switch from paper to electrons, it is possiblethat physical national borders will lose their significance in financial markets and real
economies. Assuming that the current central banking system is based on the local
framework—that is, the nation—the trend of globalization caused by technologicaladvances is an important issue that the forum will need to continue to study.
This forum has attempted to regard electronic payment technology as one
segment of the broader spectrum of technological advance. The forum will continue
to research further the effect of the technological advances on monetary policy.

33

APPENDIX: THE DEVELOPMENT OF ELECTRONIC PAYMENTTECHNOLOGY AND THE MONEY MULTIPLIER
In this appendix, we analyze the effect of electronic payment technologies on themoney multiplier. (The descriptions below are based on the paper by Ikeo, K., T.
Kawamoto, and F. Taniguchi for the fourth meeting.) We will begin by notating therelationships between high-powered money supplied by the central bank, bankreserves, and the money supply.
Money supply M is the sum of the cash balance C and the bank deposit balance
D as follows.
M = C + D.

(1)

High-powered money H is the sum of the reserve balance R and the cash balance
C as follows.
H = R + C.

(2)

Therefore, the money multiplier (M/H ) is
C +1
M
C+D
D
— = ——— = ————.
H R +C —
R +—
C
D D

(3)

Note that C /D is the ratio of cash to deposits and that R/D is the required
reserve ratio.
When electronic money appears, the definition of the money supply will bechanged, adding the electronic money balance E so that61
M = C' + E + D'.

(4)

Note that C' and D' represent respectively the cash balance and deposit balance
after the appearance of electronic money. The money multiplier is therefore
C' + —
E +1
—
M
C'
+
E
+
D'
D'
D'
— = ————— = —————— .
H
R' +C'
R' + —
C'
—
D' D'

(5)

Comparing equations (3) and (5), it is likely that the reserve ratio R'/D' will
be equal to the reserve ratio R /D prior to the appearance of electronic money. In
addition, we can derive following conclusions.

61. This assumes that electronic money is held as a “stock” (in other words, that electronic money is used to someextent as a means of storing value), and that electronic money issuers also extend credit. If electronic money is
only used as a means of payment and the amount of electronic money held in stock is small, the change in themoney multiplier caused by the emergence of electronic money will be negligible.

34 MONETARY AND ECONOMIC STUDIES/MAY 2000

Forum on the Development of Electronic Payment Technologies(1) If electronic money is substituted for cash, then the ratio of cash to deposits
C' /D' will be lower than the previous C /D. In this case, the value of (C' + E )/D'
will be virtually equal to the value of the previous C /D. This indicates that themoney multiplier after the emergence of electronic money will become higher
than previously.
(2) If electronic money is substituted for deposits, then electronic money issuers
will be able to save on required reserves compared to traditional banks, so thetotal reserves R' will probably decline. There will be no change in C' (C = C' ),and E + D' will be virtually equal to the previous D. It is therefore easy toconfirm that the money multiplier will rise in this case as well.

35

ATTACHMENT 1: MEMBERS OF THE FORUM ON THE
DEVELOPMENT OF ELECTRONIC PAYMENTTECHNOLOGY AND ITS IMPLICATIONS ON
MONETARY POLICY (AS AT MARCH 1999)
Chairman

Ryuichiro Tachi

Professor Emeritus, University of Tokyo

Members

Kazumi Asako

Professor, Hitotsubashi University, Economic
Research Institute
Professor, University of Tokyo, Departmentof Economics
Professor, Keio University, Departmentof Economics
Professor, Hitotsubashi University, Economic
Research Institute
Professor, University of Tokyo, Departmentof Economics
Professor, Waseda University, Asia PacificResearch Center
Professor, University of Tokyo, Departmentof Law
Professor, University of Tokyo, Social Science
Research Institute
Chairman, Japan Economic Research Center
Professor, Chuo University, Economics
Department
Professor, University of Tokyo, Departmentof Economics

Fumio Hayashi
Kazuhito Ikeo
Takatoshi Ito
Motoshige Itoh
Mitsuru Iwamura
Hideki Kanda
Masahiro Kawai
Yutaka Kosai
Megumi Suto
Hiroshi Yoshikawa
Observers

Toshiharu Kusu
Naoyuki Aoki
Kazuo Ueda

Chief Manager, Markets Division, Monetary
Planning Department, Ministry of Finance
Planning Officer, General Planning
Department, Economic Planning Agency
Policy Board Member, Bank of Japan

Bank of Japan Yasushi Yamaguchi
Kunio Okina

Deputy Governor
Director, Institute for Monetary andEconomic Studies
Mahito Uchida
Chief Manager, Research Division 1, Institutefor Monetary and Economic Studies
Wataru Takahashi
Chief Manager, Research Division 2, Institutefor Monetary and Economic Studies
Takamasa Hisada
Chief Manager, Policy Research Division,
Policy Planning OfficeShuhei Aoki
Chief Manager, Payment System Division,
Financial and Payment System Office
Fumikazu Taniguchi Research Divisions 1 and 2, Institute for
Monetary and Economic Studies
Takuji Kawamoto
Research Division 1, Institute for Monetaryand Economic Studies

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Forum on the Development of Electronic Payment Technologies

ATTACHMENT 2: TOPICS OF THE FORUM ON THE
DEVELOPMENT OF ELECTRONIC PAYMENTTECHNOLOGY AND ITS IMPLICATIONS ON
MONETARY POLICY 62
Meeting No. 1
Introduction of the BIS report “Implication for Central Banks of the Developmentof Electronic Money ” (Secretariat)
Meeting No. 2
Outline of electronic money, electronic payment technologies, and their economic
and social impacts (M. Iwamura)
Meeting No. 3
Dollarization and monetary policy: implications for electronic payment technologies(Secretariat)
Meeting No. 4
Points of discussion concerning electronic money (K. Ikeo)
Meeting No. 5
Electronic money and credit creation (Secretariat, on behalf of H. Yoshikawa)
Meeting No. 6
Credit cards and electronic money (T. Ito)
Meeting No. 7
Outline of report of the Study Group on an Environment for Electronic Money andElectronic Payments (H. Kanda)
MMFs and electronic money (M. Itoh)
Meeting No. 8
Discussion points not yet addressed by the forum (Secretariat)

62. Presenters’ names are in parentheses.

3738 MONETARY AND ECONOMIC STUDIES/MAY 2000