Bank reserves at the Bank of Japan (BoJ) have fallen since the start of the year despite ongoing securities buying under the asset purchase program (APP). This could suggest that the BoJ under outgoing Governor Shirakawa has been fighting a rearguard action against government pressure for monetary activism by sterilising its QE operations – or, indeed, over-sterilising. On closer inspection, however, the fall in bank reserves appears to reflect a seasonal rise in government cash at the BoJ – reserves should rebound as this increase reverses.

The first chart shows BoJ total assets / liabilities and bank reserves, along with projections for 2013 based on current APP plans and an assumption that other balance sheet items are unchanged at end-2012 levels. Assets are tracking the projection: year-to-date APP securities purchases of ¥7.9 trillion by 10 March are consistent with the first-half target of ¥18.4 trillion, while changes in other holdings / loans have been offsetting.

Why, then, are bank reserves undershooting – by ¥13.1 trillion currently? The answer is that the government has increased its lending to the BoJ significantly since the start of the year. Other things being equal, a rise in government cash at the BoJ implies a withdrawal of funds from the rest of the economy, reflected in a fall in bank reserves. Government deposits at the BoJ plus lending under repurchase agreements rose by ¥15.2 trillion between end-2012 and 10 March.

This rise in government cash appears to reflect seasonal factors rather than any policy decision – lending to the BoJ expanded similarly in the first three months of the last three years, as the second chart shows. The seasonal pattern suggests that the recent increase will reverse sharply in late March / April, in which case bank reserves should reconnect with the projection. Such a rebound in reserves would coincide with the arrival of new Governor Kuroda and could be misconstrued as signalling a further BoJ policy shift.

Quoted bank interest rates on mortgages and household savings products were mostly lower again in February, partly reflecting the continuing impact of the Funding for Lending Scheme (FLS). Falling bank rates and exchange rate weakness are delivering a further loosening of monetary conditions when money growth is at a five-year high, arguing strongly against more QE.

Since June 2012, before the July announcement of the introduction of the FLS, the average quoted rate on a two-year fixed-rate mortgage at a 75% loan-to-value ratio (LTV) has fallen from 3.74% to 2.87%, a decline of 87 basis points (bp). 90% LTV mortgages have cheapened by 112 bp over the same period, while the interest rate on two-year fixed-rate savings bonds has dropped by 100 bp – see chart.

Declines in advertised rates on new variable-rate products have been smaller but still significant: two-year 75% LTV mortgages have cheapened by 49 bp since June, while the average rate on instant-access deposits including a bonus has fallen by 52 bp.

Lower funding costs, however, have yet to filter through to existing borrowers on standard variable rates – the average SVR has risen from 4.22% to 4.40% since June. This suggests that banks are cutting interest rates on new mortgages in order to generate enough demand to keep their loan books stable – necessary to obtain FLS funding on the cheapest terms – while widening margins on their business with “trapped” SVR borrowers.

In other UK news, industrial production fell by 1.2% in January, reversing a 1.1% December gain. Bad weather is likely to have played a role and, even assuming no rebound, the implied drag on first-quarter GDP is tiny – January production was 0.5% lower than the fourth quarter average while industry accounts for only 15% of whole-economy output, giving a negative GDP impact of 0.075%. There is currently no hard data on early 2013 performance of the services sector, which will drive the first-quarter GDP result*.

*At the risk of repetition, non-oil GDP adjusted for the Olympics rose in the fourth quarter so a first-quarter decline would not imply a “double dip” in the onshore economy. As previously discussed, an earlier onshore double dip was revised away in GDP figures released last month.

Monetary trends and leading indicators continue to suggest a slowdown in global economic growth from a peak to be reached in the second quarter.

After a small rise in January, global six-month real narrow money expansion is estimated to have fallen again in February, based on monetary data covering 60% of the G7 plus emerging E7 aggregate – see first chart. Real money growth remains respectable by historical standards but has declined significantly from an October 2012 peak, suggesting a slowdown in economic momentum from spring 2013, allowing for the usual half-year lead.

The February decline in the global money measure owed much to China, where real M1 expansion more than reversed a sharp rise in January  – second chart. A previous post argued for caution in interpreting strong January money and credit data because of a probable upward distortion from the late timing of the Chinese New Year. The February results suggest moderate Chinese economic growth.

Meanwhile, a global leading indicator derived from OECD data rose at a slower pace in January, consistent with it reaching a peak in February or March – third chart. A longer-range “double-lead” measure remains below a high reached in October 2012, though has yet to fall significantly. These signals are consistent with the message from monetary trends, i.e. further near-term strength in coincident economic data but some cooling into the summer.

Global growth peaks in recent years have coincided with a transition from "risk-on" to "risk-off" market behaviour. Note, however, that global real money continues to outpace industrial output by a wide margin – sustained bear markets rarely occur against a backdrop of “excess” liquidity, as documented in previous posts, e.g. here.