Posts last year (e.g. here) suggested that Japanese economic and equity market performance would disappoint in 2014. This pessimism was based on the failure of QE to boost monetary growth significantly and the expected inflation impact of the April sales tax rise. The real money supply, in other words, was on course to contract, making continued economic expansion unlikely.
The negative view was reinforced by a monetary slowdown during the first half of 2014. Six-month growth of narrow money M1 fell to a 51-month low in July, with the broader aggregates also showing significant weakness – see first chart.
The money measures, however, have bounced back solidly in August and September. The negative impact of the sales tax hike, meanwhile, is waning. The six-month rise in consumer prices, seasonally adjusted but not annualised, should drop from 2.4% in August – the latest available number – to about 1.0% in October.
The second chart includes October estimates of six-month real money growth assuming that nominal growth is unchanged from September and inflation falls back as expected. The suggestion is that real money trends now support a resumption of economic expansion.
Money growth remains subdued but QE could be gaining greater traction. As previously discussed, the initial monetary impact was small because the Bank of Japan (BoJ) bought securities mainly from banks. The rate of decline of banks' bond holdings, however, has slowed sharply since early 2014. This may reflect increased BoJ buying from government pension funds, who are under strong pressure to reduce their domestic bond weighting.
Japanese industrial output has slumped since early 2014 but should – as in other countries – post a strong rebound in September. Trade figures this week support this expectation: export volume rose by 1.8% from August and is up 3.6% since June – third chart. The October “flash” manufacturing purchasing managers’ survey, meanwhile, was encouraging, with the forward-looking new orders component at its highest since February.
