Japanese monetary trends suggest that the economy will recover from recent stagnation.

Narrow money M1 rose by 1.8% in February / March combined, representing the largest two-month gain since March / April 2011, following the Tohoku earthquake and tsunami. Six-month growth of real (i.e. inflation-adjusted) M1 in March was the highest since September – see first chart.


The pick-up reflects the Bank of Japan’s 29 January decision to cut the marginal interest rate on bank reserves to -0.1%. The 1.8% increase in M1 in February / March is identical to an increase in Eurozone M1 in July / August 2014 after the ECB cut its overnight deposit rate to -0.1% in June. Eurozone M1 acceleration was sustained and was followed by stronger economic growth from late 2014 (when the IMF was warning of a 40% risk of a recession).

Japanese six-month real narrow money growth is currently still at the low end of the range across major economies, suggesting better economic prospects elsewhere – second chart.


Broad money M3 has yet to confirm the more positive signal from M1, growing by 0.2% per month in February and March, in line with the average over the prior 12 months. Six-month growth of real M3 eased further in March – first chart.

M3 has been comically impervious to the BoJ’s QE blitz. Annual growth of 2.6% in March was identical to the rate in April 2013 when incoming Governor Kuroda fired his “quantitative and qualitative easing” (QQE) bazooka. In monetary terms, his missile was defused by a combination of commercial bank sales of JGBs, a balance-of-payments outflow and lack of private sector credit demand.

The third chart below shows that a rise in the contribution to annual broad money growth since early 2013 of expanding BoJ credit to the government has been outweighed by a faster contraction of commercial bank lending. Posts in 2013 (e.g. here) argued against claims that QE would boost broad money growth significantly but the scepticism did not extend to expecting zero impact.


QQE did contribute to a massive undershoot of the yen. Economic pessimists argue that the currency’s rebound will deliver a further blow to a struggling economy. The rise to date, however, has reversed less than a third of the fall in the effective rate since 2012, while a recovery in global trade during 2016 may outweigh any negative competitiveness effect on export performance.