April 16, 2018
Bank of Japan
Central Banking in the Digital Age
Closing Remarks at the IMF-JFSA-BOJ Conference on FinTech
Masayoshi Amamiya
Deputy Governor of the Bank of Japan
Introduction
I would like to express my sincere gratitude to all the participants. It was a great
pleasure for us, the International Monetary Fund, the Financial Services Agency, and the
Bank of Japan, to hold such a large conference on financial innovation in Asia. Indeed,
this conference symbolizes how the world has changed in this decade.
IT innovation and Changes in Finance and Economy
Looking back on 2008, a decade ago, the biggest challenge to the IMF and financial
authorities all over the world was how to tackle the global financial crisis. Smartphones
were still in their very early stage. Crypto-currencies had not yet appeared.
Since then the world economic landscape has dramatically changed. The global
economy has overcome the crisis and regained its growth momentum. With the rapid
innovation of information technologies, the movement described as the "information
revolution" or "data revolution" has developed globally, bringing new growth
opportunities for financial services and economic activities. Asia has been particularly
influenced by such IT innovation.
Let me pick up the issue of "financial inclusion" for example. This was a global social
issue already as early as 2008. Since then the number of smartphones has skyrocketed,
and many people, including those in emerging economies in Asia, have become able to
access financial services via smartphones. IT innovation has promoted "financial
inclusion" in a way which was not expected a decade ago. Such wider access to
financial services is also stimulating various new economic activities.
Smartphones also produce a gigantic amount of data as people use smartphones
everywhere in their daily lives. Such "big data" are becoming more and more important
as intangible assets in a broad range of economic activities. Global "data-giant"
companies, which have grown rapidly in recent years, often provide various services
including financial ones free of charge, while utilizing big data gathered through these
services for multiple purposes. Moreover, IT innovation has created new business
models, such as "the sharing economy."
New policy challenges
IT innovation also raises various new challenges to financial authorities, including
central banks. Among them, let me point out four issues.
(i) Impacts on Financial Markets
First, high-frequency trading, or HFT, utilizing algorithms and AI has recently increased
its role in various financial markets. Financial authorities need to carefully examine how
such trading strategies influence price formation, market volatility and liquidity, since
they may have important implications in terms of market stability and the transmission
mechanisms of monetary policy. Also in this context, the new role of central banks as
"market makers of last resort" moves into the spotlight.
(ii) Impacts on Real Economy and Prices
Second, we should try to understand the impacts of IT innovation as well as IT-oriented
new business activities, such as e-commerce and the sharing economy, on the real
economy and price developments. Such issues are deep-rooted and wide-ranging, and
not limited to the issue of statistics, such as the difficulty in measuring the growth of
e-commerce and the overall retail sales due to the limited coverage of existing statistics.
Let me raise one of the fundamental challenges. Nowadays data-giant companies
provide various free services because they use these services also for collecting data and
utilize those data for their business. From the users' viewpoint, they actually give their
own data to those companies in exchange for using these services, instead of paying
fees. It is becoming more and more difficult to grasp such new economic activities by
traditional analytical tools, such as demand and supply curves on price-quantity
dimension.
(iii) Importance of Cyber Security and Data Protection
Third, in accordance with IT innovation, cyber-security and data-protection are
becoming more important for maintaining financial stability. Recently, data-giant
companies have entered into financial services, and the utilization of big data has
become more pronounced in financial businesses. In addition, various new instruments,
including the internet and smartphones, are used for access to financial services. All of
these developments emphasize the importance of cyber-security and data-protection.
(iv) Impacts on Currency, Payments and Settlements
Lastly, we should carefully examine the impacts of IT innovation on currency, payments
and settlements. "Crypto-currencies" and "central bank digital currencies" are now
gathering great attention all over the world. Moreover, these issues also stimulate global
discussions on to what extent central banks should provide their payment and settlement
infrastructures to society. I would like to elaborate on these issues further.
Innovation and Currency System
Looking back in history, many central banks, including the Bank of Japan, were
established to overcome the turmoil caused by the issuance of multiple payment
instruments in a disorderly manner, so as to restore stability of the monetary system. In
order to fulfill such a mission, central banks were exclusively assigned the role of
issuing "central bank money" with finality, namely, banknotes and central bank deposits.
The modern currency system, which consists of a central bank and private banks, is
characterized as "a two-tiered system."
In this two-tiered system, the central bank specializes in supplying banknotes and
central bank deposits, while private banks perform the function of credit creation and
provide deposit currencies as broader money. Through such activities, private banks
provide payment services to the general public and allocate financial resources to the
economy as loans and credits.
From the perspective of information processing, the emergence of central banks allowed
people to get rid of the burden of evaluating the credibility of many payment
instruments. The creation of central banks has substantially reduced the costs of
information processing in payments and settlements. At the same time, private banks
have contributed to efficient allocation of financial resources through their function of
information processing. The modern two-tiered structure reflects the wisdom of human
beings in history to achieve both efficiency and stability in the currency system.
In this regard, the issuance of central bank digital currencies for general use could be
analogous to allowing households and firms to directly have accounts in the central
bank. This may have a large impact on the aforementioned two-tiered currency system
and private banks' financial intermediation.
Under the current system, the central bank allows direct access to its accounts only to a
limited number of entities such as private banks. From the viewpoint of the usage of
information, the central bank leaves the private sector the opportunities to utilize
detailed data such as "who buys what" attached to daily transactions. At the same time,
the central bank can obtain the information necessary to maintain the stability of
payment and settlement systems through operating its wholesale settlement systems.
The issuance of central bank digital currencies could also affect such a role-sharing
structure for utilizing information.
To sum up, IT innovation raises many fundamental questions and challenges related to
the currency system, the design of central bank infrastructure and the utilization of
information attached to economic activities. I sincerely hope our understanding of these
issues will be further deepened in the future.
Initiatives Taken by the Bank of Japan
To tackle these new challenges, the Bank of Japan has recently been taking various
initiatives in the fields of innovation and FinTech. In 2016 the Bank established its
"FinTech Center." The Bank has also been conducting a joint research project called
"Project Stella" with the European Central Bank to study the potential of distributed
ledger technology. Although the Bank of Japan does not have a plan to issue its own
digital currency at this juncture, the Bank fully acknowledges the importance of deeply
understanding innovative technologies not only for maintaining financial stability but
also for seeking the possibility of applying them to central bank infrastructure in the
future. Central banks should always be attentive to on-going innovation, and continue
making efforts to provide the best infrastructure to society in accordance with the
development of technologies.
I believe that this conference was very informative and fruitful for all participants. I
sincerely hope that discussions on these issues will continue in various international
forums, in order for innovations to contribute to the development of financial services
and economic activities. At the end of my remarks, I wish each of you a safe journey
home.
Thank you for your attention.