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The fractional reserve monetary system controlled by the Bank of Japan Central Bank (BOJ) is the primary source of the current Japanese economic problem. The BOJ controls the money supply of the Japanese Yen (¥) using a debt based monetary system and supplies liquidity to a group of fractional reserve banks for first use and control in an inflationary wealth transfer and misallocation of capital to the banking sector each time new money is created.

CHART 1 DATA SOURCE: Fractional Reserve Monetary Intermediation Cost Impact Chart. The chart above shows the impact of fractional reserve monetary intermediation unearned wealth transfer.

The monetary intermediation cost of the Bank of Japan is at least 98.7% inefficient and is on the order of 3¼% of GDP per year, compounded over 60% since 1984 and over 80% since 1956, that could be more efficiently handled by a full reserve credit banking system, development of depositor owned institutions to exclusively hold demand deposits and direct issuance of new money creation to the Japanese people based on a GDP Index Monetary Standard.

CHART 2 DATA SOURCE: Business Cycle with Leverage and Intermediation Added using Excel Sine Wave Graph. The chart above shows the impact of fractional reserve leverage, which adds risk to the Japanese economic system in the form of increased variability of returns but does not change total returns to the system, shown above as increased amplitudes of the business cycle. The compounding monetary intermediation cost of the Bank of Japan is also shown gradually increasing in size that is actually a reduction to system returns.

It is believed that with the discovery of the Modigliani-Miller Financial Theorem in 1958 of the irrelevance of capital structure that proof of the superiority of the full reserve monetary system has existed because of its lower monetary intermediation cost. There is no financial intermediation loss from a full reserve system and there would be a more efficient allocation of economic returns reducing and/or eliminating the current wealth transfer disparity caused by the fractional reserve system.

A banking business model based on full reserve financial intermediation, time matched funding spread lending, is not a new concept. It has had historical support from at least five previous Nobel Prize winners, Milton Friedman, 1976, James Tobin, 1981, Maurice Allais, 1988, Merton Miller, 1990 and Frederick Soddy, 1921, a former Secretary of Agriculture and Vice President of the United States, Henry Wallace and numerous distinguished economists and financial writers including Mervyn King, retiring governor of the Bank of England and Irving Fisher, one of the foremost economists of the first half of the 20th Century.

Economic Recovery Plan for Japan

Plan Summary
The attached Economic Recovery Plan recommends monetary reform as the best go forward economic recovery plan for Japan. The recommended reform is to convert to a full reserve monetary system based on a GDP index standard with direct issuance of new money creation, known as seigniorage, to the Japanese people instead of Bank of Japan member banks. The improvement to the Japanese economy from conversion is expected to be the approximate amount of the reduced monetary intermediation cost, on the order of 3¼% of GDP per year, improve the balance sheet of Japan on the order of ¥742.8 trillion as of fiscal year 2011 and restore on the order of seven million jobs.

CHART 3 DATA SOURCE: BOJ Annual Monetary Intermediation Cost to Economy 1984 to 2011, Attachment 5. The chart above shows the annual monetary intermediation cost of the BOJ to the Japanese economy that could be saved by replacing the BOJ fractional reserve system with a full reserve system.

CHART 4 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply, Attachment 12. The chart above shows the impact of the BOJ creating debt based money faster than economic growth, transferring wealth from the other sectors of the economy to the banking/financial sector by virtue of its first use and control of the new money.

CHART 5 DATA SOURCE: Bank of Japan Monetary Intermediation Cost Impact on Economy and Jobs, Attachment 11. The chart above shows the expected impact of conversion to a full reserve monetary system for the Japanese economy.

The complete PDF paper can be viewed and/or downloaded from the link below:
Economic Recovery Plan. The version posted was last modified December 10, 2012.
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About the Author William Haugen
I have a Masters degree in Finance from Carnegie Mellon University, Pittsburgh, PA in 1983 and a Bachelors degree in Business from the University of Washington, Seattle, WA in 1981. I live in Dallas, Texas. If you have comments or suggestions, please email me at

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Version 1.0 © 2012 William A. Haugen
Last Modified: March 10, 2013.
Origination date of page December 10, 2012.
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