The Japanese demand for large denomination notes is relatively high. Perhaps as a result, Japanese safe sales have also soared.
Asked why people demand big bills, economists typically say, “illicit activities.” Below you can see why criminals might like cash:
Negative Interest Rate Policy (NIRP) and Cash
People are also demanding cash because of NIRP.
Imagine for a moment that a bank said we have to pay them for the safety of a deposit. Called a negative interest rate, the policy can kick in when central bankers want to create inflation and discourage saving. Unfortunately, negative interest rates also inspire people to hoard cash. For all of the reasons that large denomination bills are suited to illicit transactions, they also serve as the ideal way to avoid the expense of negative interest rates.
So, as Japan slid further into negative interest rate territory, storing wealth with cash became more attractive. Since 2002, the demand for 10,000 yen notes rose by 6.2%
Similarly, after the Swiss National Bank resorted to negative interest rates in December 2014, the value of 1,000 franc bills expanded to 60% of their circulating cash.
Our Bottom Line: Financial Intermediaries
Through a circular flow model of the U.S. economy, we can imagine banks pumping money. Sort of like blood circulates life-supporting nutrients around the human body, our banking system brings sustenance to businesses.
Below with financial intermediaries in the middle, businesses receive money from savers.
However, when negative interest rates motivate households and businesses to hoard cash, an unintended consequence strikes the circular flow.
My sources and more: Some good detail on the connection between high denomination bills and monetary policy was in a WSJ article, this CNN discussion and from Bloomberg. Then, for the illegitimate side, this paper from Harvard provided a thorough overview (and my diagrams). But, for my best source, if you have a spare hour or take long walks like I do, this econtalk interest rate discussion with econ professor Scott Sumner was excellent.
