Recent Japanese economic news has mostly disappointed. Real consumer spending recovered by only 1.3% in May after an 8.1% drop in April. Core machinery orders plunged 17.4%, to a 15-month low. Export volumes were down 2.2%, still failing to benefit from a lower yen.

Monetary trends have been suggesting economic weakness. Six-month nominal growth of narrow and broad money has fallen sharply since end-2013, with the decline extending last month – see chart. The aggregates have contracted in real terms, reflecting the inflation impact of April's sales tax hike.

Annual growth in broad money M3, 2.4% in June, is back to the level prevailing before incoming Bank of Japan (BoJ) Governor Kuroda launched his mega-QE experiment in April 2013. On a monetarist interpretation, therefore, the experiment has flopped. As previously explained, the BoJ has, in effect, engaged in a JGBs / reserves swap with the banks, with no impact on the size of their balance sheets or the wider economy.

Current monetary trends suggest that economic news will continue to challenge optimists, although exports should benefit near term from stronger global activity. Stock market bulls, meanwhile, are pinning their hopes on the Government Pension Investment Fund (GPIF) raising its allocation to domestic equities, selling bonds to the BoJ to fund the switch. This would amount to QE shifting from JGBs to equities by the back door.

The GPIF, however, could delay the execution of any such policy change. Why should it assume the role of “greater fool” by buying equities at prices inflated by front-running by foreign hedge funds and other speculators? Its managers, whose heavy bond weighting has paid off, can afford to be patient, spreading purchases over years and timing them to take advantage of market weakness.