Bank of Japan securities purchases of ¥52 trillion in 2013 (up from ¥36 trillion under the Shirakawa plans) are equivalent to 4.6% of the M3 broad money supply measure. According to the Bank of England, QE “pass-through” to broad money has been about 60% in the UK. Applying the same figure to Japan suggests a broad money increase of 2.8%. There are grounds for believing that the BoE estimate is too high – a previous post argued that pass-through may have been as low as 20%, which if applied to Japan would imply an M3 boost of only 0.9%. Bottom line: suggestions of a 10% broad money rise over the next year are implausible. The FT’s headline about money in circulation doubling is highly misleading.

The Bank of Japan (BoJ) today announced a stepping-up of monetary easing but previous plans were already significant – the change is unlikely to transform Japanese economic prospects.

Under the new plans, the BoJ’s securities holdings will rise by ¥52 trillion* during 2013 versus ¥36 trillion implied by the superseded Asset Purchase Program (APP). The ¥16 trillion increase is of the same order of magnitude as rises of ¥10 trillion and ¥11 trillion in 2013 buying announced in December and October 2012 respectively under the previous supposedly-hawkish BoJ leadership.

The more significant elements of the new plans are:

• Securities holdings will rise by a further ¥51 trillion in 2014 versus only ¥10 trillion implied by the APP.

• The BoJ will now explicitly target monetary base expansion of ¥60-70 trillion yen per annum.

• Treasury bill buying will be deemphasised and JGB purchases will no longer be limited to short maturities – this increases the likelihood that the BoJ will transact with non-banks, thereby directly boosting the broad money supply.

The first chart compares the new and old implied paths in 2013 for the BoJ’s balance sheet and bank reserves.

The acid test of the new policy will be whether it translates into a significant further pick-up in money and credit expansion. Annual growth rates of the various measures have lifted recently but remain unexceptional – second chart. Expanding the monetary base via securities purchases is no guarantee of broader money / credit improvement, as demonstrated by Japan’s prior QE experiment, as well as US and UK experience. The current plans, admittedly, are more ambitious. Qualified optimism seems warranted.

*The BoJ’s total assets are projected to rise by ¥62 trillion but this assumes a ¥10 trillion increase in lending to banks under the Loan Support Program – similar to the UK’s Funding for Lending Scheme. Such lending should be excluded from a “QE” reckoning.

The “MPC-ometer” model followed here is marginally more dovish than in March but still suggests a majority hold decision this week.

The small dovish shift mainly reflects better survey news on inflation – price expectations of consumers and CBI manufacturers eased in the latest polls. The activity inputs to the model are little changed from last month while financial market indicators remain strong, arguing for policy inaction.

The model excludes any money supply or credit quantity measure, based on their lack of influence on MPC decisions historically. The continued weakness of bank lending in February could conceivably cause some members who were previously unconvinced to vote for additional QE this month on the grounds that the impact of the Funding for Lending Scheme is proving disappointing. Such concerns, however, may be allayed by the credit conditions survey released today, showing a continued improvement in loan availability and pricing along with a pick-up in expected demand – see chart. (The view here is that the “creditist” focus of policy-makers and the media is misplaced and that recent stronger money supply expansion argues strongly against any further liquidity injection.)

The national accounts rental yield – actual plus imputed owner-occupier rents expressed as a percentage of the value of the housing stock – stood at an estimated* 4.0% at the end of the fourth quarter of 2012, the highest since 1999. This compares with a long-run average of 3.6%, suggesting that house prices are undervalued by about 10% relative to rents – see chart.

The rise in the yield from 3.9% a year earlier (i.e. in the fourth quarter of 2011) reflects a 7.3% increase in rents in the latest four quarters from the previous year offset by an estimated 3.3% growth in housing stock value.

The merits of the rental yield as a valuation metric were discussed in a previous post.

*The value of the housing stock is estimated after end-2011 by linking to the ONS (previously DCLG) house price index.

UK money supply trends remain encouraging despite the suspension of QE and ongoing weakness in bank credit. Consensus focus on the latter is misplaced since money leads the economy while credit is, at best, a coincident indicator.

The monetary aggregates favoured here are broad money M4 and narrow money M1 excluding holdings of financial institutions – such holdings are volatile and can be difficult to interpret. Annual growth of the two measures rose further to new post-recession highs of 5.4% and 8.3% respectively in February – see first chart.

The pick-up has been concentrated in the company sector – stronger corporate liquidity is typically associated with increased investment, hiring and M&A. M4 holdings of private non-financial companies rose by an annual 7.8% in February but this understates the liquidity build-up because it excludes an increase in their foreign-currency deposits – total money balances grew by 9.3%. Corporate cash continues to expand more strongly in the UK than elsewhere – second chart.

The corporate liquidity surge partly reflects strong bond issuance – £20.6 billion in the 12 months to February versus £17.1 billion in the year to February 2012 and just £400 million in the prior year.

Ample liquidity and substantial fund-raising in bond markets suggest that a continued fall in corporate bank borrowing is largely voluntary and of limited significance for economic prospects.