Japanese monetary trends continue to defy the predictions of QE supporters. The Bank of Japan (BoJ) bought ¥70 trillion of government securities in the year to April, equivalent to 15% of annual GDP and 6% of the M3 broad money supply. Yet annual M3 growth has hardly budged – 2.8% in April versus 2.6% a year earlier.
 
M3 expansion might have been weaker in the absence of QE but the policy has clearly failed to deliver the intended big liquidity injection to the wider economy. A key reason is that the BoJ’s bond-buying has been significantly offset by selling by banks, as had seemed likely at the outset. The BoJ and banks have, in effect, swapped securities and central bank reserves, with no impact on the money holdings of households and firms.

The first-round effect has been small but will there be a secondary boost, as banks deploy their increased reserves? US / UK experience is discouraging and money trends are currently losing, not gaining, momentum: six-month growth of the main aggregates has declined sharply since January – see chart.

QE supporters cite its role in pushing the yen lower and moving the economy out of deflation, at least temporarily. With nominal money and wage trends little changed, however, the inflation rise has squeezed real liquidity and incomes, cutting domestic demand. The yen slump, meanwhile, has failed to boost exports, partly because firms have widened margins: volumes in March were up only 1% on a year earlier.

Japan’s experience argues against Eurozone QE. Low Eurozone inflation is attributable to restrictive monetary conditions two years ago. Faster money growth in 2012-13 laid the foundations for the current economic recovery and should be reflected in a slow revival in inflation through 2015. The ECB is unlikely to launch full-scale QE but, if it did, the net impact on the economy would probably be small or even negative.