Posts last year (e.g. here) suggested that Japanese economic and equity market performance would disappoint in 2014. This pessimism was based on the failure of QE to boost monetary growth significantly and the expected inflation impact of the April sales tax rise. The real money supply, in other words, was on course to contract, making continued economic expansion unlikely.

The negative view was reinforced by a monetary slowdown during the first half of 2014. Six-month growth of narrow money M1 fell to a 51-month low in July, with the broader aggregates also showing significant weakness – see first chart.

The money measures, however, have bounced back solidly in August and September. The negative impact of the sales tax hike, meanwhile, is waning. The six-month rise in consumer prices, seasonally adjusted but not annualised, should drop from 2.4% in August – the latest available number – to about 1.0% in October.

The second chart includes October estimates of six-month real money growth assuming that nominal growth is unchanged from September and inflation falls back as expected. The suggestion is that real money trends now support a resumption of economic expansion.

Money growth remains subdued but QE could be gaining greater traction. As previously discussed, the initial monetary impact was small because the Bank of Japan (BoJ) bought securities mainly from banks. The rate of decline of banks' bond holdings, however, has slowed sharply since early 2014. This may reflect increased BoJ buying from government pension funds, who are under strong pressure to reduce their domestic bond weighting.

Japanese industrial output has slumped since early 2014 but should – as in other countries – post a strong rebound in September. Trade figures this week support this expectation: export volume rose by 1.8% from August and is up 3.6% since June – third chart. The October “flash” manufacturing purchasing managers’ survey, meanwhile, was encouraging, with the forward-looking new orders component at its highest since February.

Stronger-than-expected Chinese industrial output in September confirms that global production rebounded solidly last month, casting doubt on recent growth pessimism based partly on weak August data.

Chinese output rose by a seasonally-adjusted* 1.7% on the month after a 0.5% loss in August. Six-month growth was 4.2%, or 8.5% annualised – the second highest reading over the last eight months (after July).

Monetary trends suggest continued moderate economic expansion. Real M2 seems to outperform M1 as a leading indicator in China; its six-month growth is in line with the average over the last five years – see first chart. Real bank loan expansion also remains stable at a respectable level, although the wider “total social financing” credit measure has been slowing gradually, in line with official objectives – second chart.

Three countries in the G7 plus emerging E7 group have now reported industrial output for September: China, the US and Russia – see also Friday’s post. On conservative assumptions about developments elsewhere**, six-month industrial output growth for the group is estimated to have returned to its level in June. The leading indicators tracked here suggest that growth will continue to firm into early 2015 – third chart.

*Based on World Bank seasonal adjustments.
**Japanese output is assumed to rise by 3.0% in September versus a 6.0% increase suggested by a METI survey of manufacturers. Eurozone output is assumed to recover by 1.0% after a 1.8% August decline as car production rebounds from holiday-affected weakness – see Friday’s post. Output is assumed unchanged in all other countries.