What the BOJ Actually Controls
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- What he failed to mention was the fact that BOJ doesn't control the
money supply, it controls the monetary base (cash and BOJ reserve
accounts held by depository institutions, i.e., banks). Denote
the monetary base by MB.
- The BOJ influences the money supply by controlling MB and allowing
fractional reserve banking. The reserve is the amount of money
banks must keep on hand in "cash", nominally to serve depositor
demands for their money.
- In fact, the reserve is not cash (currency and coins). Nor is it
needed to supply depositors demand for payments (it's much bigger
than that). It is a regulatory tool.
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