Friday, May 20, 2016

Those new Japanese safety deposit boxes must all be empty

Remember all the hoopla about Japanese buying safety deposit boxes to hold cash in response to the Bank of Japan's decision to set negative rates? Here is the Wall Street Journal:
Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash--the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates. Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.
Well, three month's worth of data shows no evidence of unusual cash demand. As the chart below illustrates, the rate at which the Bank of Japan is printing the ¥10,000 note shows no discontinuity from its pre-negative rate rise. In fact, demand for the ¥10,000 is far below what it was in the 1990s, when interest rates were positive.

I should remind readers that the Bank of Japan, like any central bank, doesn't determine the quantity of banknotes in circulation; rather, the public draws those notes into circulation by converting deposits into notes. So this data is a pure indicator of Japanese cash demand.

The lack of interest in switching into yen notes should come as no surprise given the experience of other nations that have set negative interest rates. Data from Sweden, Denmark, and Switzerland has consistently shown that it takes more than just a slight dip into negative territory before the dreaded "lower bound," the point at which the public converts all their deposits into banknotes, is encountered.

For instance, despite the setting of a -0.5% repo rate by Sweden's Riksbank, Swedish cash in circulation continues to decline. I won't bother to provide a chart, you can go see the data here.

As for the Danes, the growth rate in Danish cash demand continues to hover near its long term average of 3.7%/year. This despite the fact that the Danmarks Nationalbank, the nation's central bank, is setting a deposit rate of -0.65%. I've charted it out below:

Definitely no lower bound in Denmark, at least not yet.

Finally, we have Switzerland where the Swiss National Bank has maintained a -0.75% rate since December 2014. Back in February, the WSJ and Zero Hedge were making a fuss out of the sudden jump in the demand for the 1000 franc note, in effect blaming the build up on the lower bound. I wrote a rebuttal at the time, Are Swiss fleeing deposits and hoarding cash, pointing out that the demand for Swiss francs is often driven by safe haven concerns. The observed increase in 1000s might therefore have very little to do with the SNB hitting the effective lower bound and everything to do with worries about falling equity prices, China, deteriorating credit quality, and more.

With many of these concerns subsiding in 2016, one might expect the safe haven demand for 1000 franc notes to be falling again. And that's exactly what we see in the chart below; the Swiss are accumulating notes at a decelerating pace, even though the SNB has not relaxed its negative deposit rate one iota.

What these charts all show is that the effective lower bound to central bank deposit rates has not yet been engaged, even after many months in negative territory. You can be sure that the global community of central bankers is watching this data too; it is telling them that, should the need arise, their respective interest rates can be pushed lower than the current low-water mark that has been set by the SNB and Danmarks Nationalbank at -0.75%, say to -0.85% or even -1.0%.

There are a few factors that might be dampening the demand for paper notes. Remember that the Swiss and the Japanese have installed cash escape inhibitors; mechanisms that reduce the incentive for banks to convert central bank deposits into cash. I've written about them here.

Secondly, the SNB and the BoJ, along with the Danes, have set up an array of interest rate tiers. While the marginal deposit earns a negative rate, the majority of the tiers are only lightly penalized or not penalized at all. This tiering represents a central bank subsidy to commercial banks; in turn, banks have passed this subsidy on to their retail depositor base in the form of higher-than-otherwise interest rates, the upshot being that very few banks have set negative deposit rates on retail customers. This has helped stifle any potential run on deposits.

Tiering and cash escape inhibitors have helped dissuade cash withdrawals by two members of the public, retail depositors and banks, but not the third; large non-bank institutions. That these latter institutions haven't bolted into cash shows that the natural costs of storing wads of paper are quite high, and that the effective lower bound quite deep.


  1. So, institutions are locked out from pursuing a risk free 75bp per annum because of storage costs.

    JP, I'm a bit surprised, having seen the credit risks and costs these same institutions run to gain a 75bp yield pickup on asset portfolios. Seems that 1) institutions are fiduciarily happy with losing 75 bp per annum or more, 2) have no plans for recourse to physical notes, while 3) no businesses have decided to take on the storage risk and provide institutions with cash management services. Agreed?

    In any case, if cash demand is as slight as you suggest, then why have cash inhibitors? Why the recent move to limit *all cash transaction* sizes in Europe (not just withdrawals)?

    Also, do you expect the negative-rate economic investment boom anytime soon? Are we seeing signs of inflation in CH and DE?

    1. Yes, I think that's right.

      "In any case, if cash demand is as slight as you suggest, then why have cash inhibitors?"

      Firstly, ony the Swiss and the BoJ have these, the Swedes, ECB, and Danes haven't seen any necessity for them. That being said, central bankers are in uncharted territory--the effective lower bound is somewhere below them, but none of them know quite where, so why not err on the side of caution? Also, I suppose that if central banks intend to go even deeper into negative territory, then cash inhibitors will become vital. Also, the longer they stay at existing negative levels the more likely financial companies will decide to get into the business of storing cash, as you point out... so putting in cash inhibitors now precludes that to some degree.

      " Why the recent move to limit *all cash transaction* sizes in Europe (not just withdrawals)?"

      As far as I know this doesn't have anything to do with negative rates; it has to do with policies surrounding terrorism, criminality, tax evasion etc.

      "Also, do you expect the negative-rate economic investment boom anytime soon? Are we seeing signs of inflation in CH and DE?"

      I don't think we should expect to get any more stimulus out of the SNB's cut from 0 to -0.75% as we'd expect from, say, 3.0% to 2.25%.

      Inflation is still pretty muted in Europe.