What kind of image does the Bank of Japan conjure up? A lot of people would say “banknotes.” But have you ever examined a banknote closely? Close examination reveals the words “Bank of Japan note” in Japanese. That’s right. The Bank of Japan is responsible for issuing banknotes. Oh, who are you, and where did you come from? I’m a “banknote professor.” I know everything about the Bank of Japan. A banknote professor? A lot of people think the Bank of Japan is a place where banknotes are issued, but it’s actually tied closely to other aspects of people’s daily lives. Really? What do they do? Right. Well, come with me. The Bank of Japan was established in 1882. The government at the time issued many banknotes to finance the Satsuma Rebellion, resulting in a surge in prices. So they transferred the responsibility of issuing banknotes to another organization, the central bank, to stabilize the value of money. This became the Bank of Japan. Other than the Head Office, the Bank currently has 32 branches and 14 local offices throughout the country. There are also seven overseas representative offices. Have you ever gone overseas and been surprised at how crumpled the banknotes are? That’s when I realized how clean Japanese banknotes are. That’s a good point. You don’t often see worn or crumpled banknotes in Japan. Why is that? First, let me show you how we’re made. As I told you before, the Bank of Japan issues banknotes, right? Yes. Well, they’re actually made at a place known as the National Printing Bureau. The banknotes are then handed over to the Bank of Japan, where they are stored in vaults. From there, they are distributed all over the world through financial institutions such as banks. The banknotes pass through the hands of many people before being passed on to me…. If only they would stay with me longer…. They don’t stick around for long. Ha ha ha! So, where do they go, then? Let’s take a look at the life cycle of a banknote. Banknotes that leave the Bank of Japan pass through financial institutions before being used for a variety of purposes by individuals and companies. They are distributed to every corner of the country, and eventually find their way back to the Bank of Japan. But what do you think is needed to ensure that people can use them with confidence? Here is a clue. What would happen if fake banknotes were circulated? We’d lose our confidence in banknotes and wouldn’t be able to buy or sell things anymore. Oh, I know! We need to stop the circulation of fake money to secure in the knowledge that the banknotes are valid. That’s why the Bank of Japan checks each and every banknote that is returned to the Bank in order to make sure there are no counterfeits, and to examine whether the banknotes are fit for recirculation. Worn-out banknotes that no longer can be used are shredded into fine pieces and recycled for use in construction materials for residential houses. Only clean banknotes are sent back into circulation. So, that’s why you don’t see many worn-out banknotes in Japan. In addition, Japanese banknotes are… made using advanced anti-counterfeiting technologies! That’s right. There are holograms that change in color or pattern when viewed from different angles. There are also latent images hidden in the banknotes that appear when you tilt them, so it’s impossible to counterfeit them. I see… banknotes would lose their credibility if counterfeits went into circulation. Clean banknotes are used to ensure people’s confidence in using money, and steps are being taken to block counterfeits. Hello! Are you ready to order? I’d like some coffee, please. It’ll cost you 1,000 yen today. Is that okay? 1,000 yen? That can’t be right! It was 300 yen just the other day! I know, I’m sorry, but the price of coffee beans went up, and we’re barely managing to stay afloat. What is going on?! You look really upset. That’s because the coffee was 300 yen just the other day, and now it’s 1,000 yen! So… what would happen if the price of goods, or in other words, prices, suddenly changed? I’d lose my confidence in money. I mean, something that was 1,000 yen today could drop in value to 300 yen again in a few days. Well, what if prices continued rising, or continued falling? For example, if prices continued to fall… that would mean a 300-yen cup of coffee would continue falling in price to 200 yen, then 100 yen. That’s known as deflation. Being able to buy things cheaply would make life a lot easier and it would be a great help. Well, it’s not that simple. When prices fall, companies that make and sell products profit less, and that leads to a drop in people’s salaries. Your salary could be cut, too. That’s no good. When people’s salaries drop, they stop spending as much. That leads to even fewer products being sold, further dragging prices down and triggering a vicious cycle. I see… so it’s really important that prices are stable. The Bank of Japan plays this vital role of “achieving price stability.” Really? But how? When prices become set to drop in an economic downturn, the Bank of Japan encourages a decline in interest rates. Lower interest rates make money easier to borrow, encouraging more people to buy things and make investments, thereby stimulating the economy. This makes it harder for prices to fall. Conversely, when the economy booms and prices look set to rise, the Bank encourages a rise in interest rates. Higher interest rates make money harder to borrow, discouraging people from spending and stabilizing the economy to make it harder for prices to rise. So, do you know how interest rates are raised and lowered? Errr… interest rates are like the cost of lending and borrowing money, so… interest rates decline when more money goes into circulation, and rise when there is less money. Is that right? That’s right. Financial institutions engage every day in short-term lending and borrowing of money, in which money is borrowed today and then returned tomorrow. The Bank of Japan controls the interest rate in these transactions. In order to lower interest rates, the Bank lends out more money to banks or purchases government bonds to increase the supply of money to the economy. Conversely, in order to raise interest rates, the Bank reduces the amount of money it lends out to banks to reduce the supply of money to the economy. Depending on the situation, the Bank of Japan may control the money it directly supplies to the economy, or it may affect long-term interest rates. Stabilizing prices though the raising and lowering of interest rates is known as “monetary policy.” The Bank’s stance on this monetary policy is decided by the Policy Board at Monetary Policy Meetings. These decisions are really important because they tie in directly with our daily lives. That’s why the Bank conducts thorough analyses and surveys on economic and price developments. The economy is analyzed through a variety of statistical data. Employees of the Head Office and branches visit companies to carry out surveys through interviews. Other than that, questionnaire surveys on the economy and prices are carried out on over 10,000 companies throughout the country once every three months. This is called the Tankan. Gathering information through its network of overseas representative offices around the world is another task of the Bank of Japan. So our lives are being supported by hard work, including detailed interviews carried out with companies. The circulation of counterfeits must be prevented and the value of money must be stabilized to ensure people’s confidence in money…. There’s one more important point, and that is…. You save or borrow money through financial institutions… or have public utility charges debited from your bank account, right? Yes. It’s very convenient. This transaction system of financial institutions is known as the “financial system.” But imagine what would happen if…. That would be a terrible thing to happen. It would create massive confusion in society. Well, the Bank of Japan supports the financial system to ensure that doesn’t happen. That would mean keeping track of the business conditions of financial institutions, too. That’s why the Bank of Japan pays direct visits to financial institutions to carry out on-site examinations, and also conducts telephone interviews. So, it’s like a medical checkup. When a financial institution has trouble making payments, and there is a danger of this having a bad influence on other financial institutions, the Bank of Japan may extend special loans. Speaking of confidence, isn’t it safest to open an account at the Bank of Japan? Unfortunately, individuals and regular companies cannot open accounts with the Bank of Japan. Only financial institutions and the government can hold accounts at the Bank of Japan. That’s why it is known as “the bank of banks” and “the bank of the government.” What exactly do you mean by that? Say a father were to send some money to his son from Bank A to Bank B. There is no actual exchange of cash between the two banks. Each of these banks has a current account at the Bank of Japan, and money is transferred between these two accounts. The Bank of Japan holds current accounts of banks, which is why it’s called “the bank of banks.” The Bank of Japan acts as a mediator to ensure the safe and guaranteed transfer of money. These transactions between financial institutions through the Bank of Japan are carried out on a computer network system known as the BOJ-NET, and daily transactions exceed a staggering 100 trillion yen. 100 trillion yen a day! That’s right. What about the “the bank of the government” then? The Bank of Japan holds the government’s deposit account. The taxes we pay pass through financial institutions to gather in this account. On the other hand, pensions are paid from this account into accounts at other financial institutions held by elderly people. This isn’t something we’re all normally aware of, but the Bank is actually supporting our everyday transactions. The Bank of Japan also implements a variety of measures to ensure the normal flow of money even at times of major disasters. For example, the Bank quickly replaced the huge quantities of money damaged by the tsunami and fire in the wake of the Great East Japan Earthquake, and supplied huge amounts of money to financial markets to stimulate the flow of money. I’d always taken it for granted that we can withdraw cash and buy things with money, but it’s all possible thanks to the fact that our confidence in money is ensured. That’s right. Now you know how important that is to our daily lives. Yes, I see that the the Bank of Japan plays a key role in our daily lives.