The Function and Actual Condition of the “Money” Account in the Creation of the Monetary Base: An Analysis of the Financial Statements of the Bank of Japan

This study considers the concept and expansive process of a liability in connection with the Bank of Japan’s (BOJ) financial statements.  We first examine Japan’s Flow of Funds Accounts by analyzing the process of creating the monetary base and the accounting procedure of the BOJ.  We then clarify the treatment of national bonds by both the government and the BOJ and the effect on the whole economy.  Although the money created by the BOJ is recognized as a liability, the nature of the “money” account is still ambiguous.  In this study, we therefore consider a liability through its economy-wide effect.

 The monetary base, which represents the value circulating in the economy, is created through the BOJ’s acceptance of the national bonds issued by the Japanese government.  In accounting terminology, money, which is an asset, flows into the government account through the issuance of national bonds, which have to be settled by using money in a future period.  If the BOJ treats national bonds as an asset account, then the monetary base including money creates a liability for the corresponding account.  In brief, the government and BOJ plan the creation of the value circulating and issue national bonds for that amount.  Then, the BOJ carries the value as money, which is a liability, in the sequence of the creation process before finally creating value according to the plan.

 The circulating value in the economy may be controlled through valuing national bonds (i.e., government debt).  There are two origins for this value: (1) the value retained by the external credibility system (e.g., credit, stock, money), termed the heteronomous value, and (2) the value retained without any reliance on external influences (e.g., precious metals), termed the autonomous value.  The external credibility system (i.e., the heteronomous value) relies on legislation, the developed market, and financial accounting procedures, the latter of which supply accounting information on the debts and stocks of the issuing organization to interested parties for their decision making.  This money has a heteronomous value, too.

 In this study, first, the nature of the accounting of the “money” account is investigated by demonstrating that this account is not characterized as a debt from the consideration of financial reality (i.e., Flow of Funds Accounts) as well as from a legal and historical standpoint.  Furthermore, financial accounting (or at least the disclosed financial statements of the BOJ), contributes to the creation of the circulating value in the economy by setting the mechanism of the “money” account as a liability.  In addition, we insist that the mechanism is indispensable for the practical creation of circulating value in the economy.