A 9.5% (not annualised) plunge in Japanese industrial production between March and September 2012 reflected both a fall in exports due to global weakness and a strong yen and softer domestic demand. Downside risk had been signalled by a sharp slowdown in narrow money, M1, expansion in late 2011 / early 2012 – see first chart.
Six-month M1 growth, however, bottomed in May 2012 and has since recovered strongly. The broader aggregates are now giving a confirming positive signal – six-month M2 and M3 expansion rose to a 10-year high in December. Combined with a 14% depreciation of the trade-weighted yen since July, this suggests much better economic data in early 2013. The snap-back in the latest economy-watchers’ survey may be an early taster – second chart.
Against this backdrop, it is far from clear that a further expansion of the Bank of Japan’s asset purchase program (APP) is either necessary or desirable. Current APP plans already imply securities purchases of ¥36 trillion, or about $400 billion, during 2013. The central bank should aim for stable monetary growth above the average in recent years, avoiding surges and inevitable relapses that increase economic volatility.
The latest fiscal "stimulus", meanwhile, is a throwback to the failed packages of the 1990s and 2000s, which had no lasting impact save to trash the government’s balance sheet.
Fiscal expansionism and the removal of the last vestiges of central bank independence risk wrecking a promising economic outlook by raising the spectre of uncontrolled inflation, thereby putting upward pressure on bond yields and tipping Japan into a debt trap as interest servicing costs spiral. Equities may initially climb further as the BoJ injects liquidity but the current policy shift warrants increased caution, not optimism, about medium-term prospects.
