Japanese monetary trends continue to signal respectable economic performance but are less strong than in the Eurozone and US, despite record QE.
Narrow money M1 and broad money M3 rose by 0.3% and 0.2% respectively in March. Six-month growth rates eased to 2.6% for M1 and 1.6% for M3, or 5.3% and 3.2% annualised respectively – see first chart. For comparison, Eurozone M1 and M3 rose by 11.8% and 5.1% annualised in the six months to February, the latest available month.
M1 and M3 slowed in late 2013 / early 2014 – first chart. With inflation boosted by the April 2014 sales tax hike, real money contracted, correctly signalling economic weakness – second chart. Nominal money growth recovered during the second half of 2014 while six-month inflation has fallen back, reflecting both a reversal of the sales tax effect and weaker energy prices. Real money trends, therefore, are again consistent with respectable economic expansion.
The bigger story is that QE appears to have had little impact on monetary growth in recent years. The annual increase in M3 stood at 2.1% when the Bank of Japan (BoJ) launched QE in October 2010. It was 3.0% in March 2015. The BoJ is currently buying securities at an annual pace of ¥83 trillion, equivalent to 6.8% of M3. This suggests QE “pass-through” of 13% (i.e. 0.9 as a percentage of 6.8). An earlier analysis of UK QE arrived at a similar pass-through estimate of 21% – much lower than the Bank of England’s claimed 59%.
What explains the high “leakage”? An analysis of the monetary counterparts shows that the increase in BoJ lending to the government has been offset by a reduction in bank exposure. Banks have cut their lending because QE has boosted their reserves at the BoJ, meaning that they need to hold fewer government bonds to meet liquidity targets*. When QE started in October 2010, combined lending to the government by the BoJ and banks was contributing 3.3 percentage points (pp) to annual broad money growth, comprising 0.5 pp from the BoJ and 2.7 pp from banks** – third chart. On the latest figures, for January 2015, the combined contribution was 2.9 pp, with the BoJ adding 5.3 pp but banks subtracting 2.4 pp.
Near-term economic prospects may be improving but the BoJ deserves little credit.
*This response was predicted in a post in April 2013.
**Difference due to rounding.
