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Japan's QE blitz has been aiming at the wrong target

Three months after the election of Shinzo Abe as Prime Minister of Japan, his close associate Haruhiko Kuroda was appointed Governor of the Bank of Japan and promptly announced a substantial bond purchase programme aimed at conquering deflation and restoring the countyís economy to growth after 20 years of stagnation.

Since April 2014, the Bank of Japan has been spending 70 trillion yen each month on Japanese Government bonds. The objective of these asset purchases was to double the monetary base before the end of 2014.There are now less than two months to go and the monetary base has risen from 146 trillion yen in March 2013 to 257 trillion in the space of only 19 months. However, the effect on broad money has been negligible. Annual M3 growth has at least been positive, but it has struggled to remain above the 3% threshold. Japanese banks have ended up with much higher cash assets as a result of the sale of these bonds to the BOJ, but nothing much else has happened to boost their balance sheet totals.

Given such sluggish broad money growth, the lacklustre performance of the Japanese economy is unsurprising. It entered a recession in the third quarter of this year. An increase in sales tax from 5% to 8% in April caused Japanese consumers to purchase their big-ticket items in the first months of the year and then to rein in their spending. Last month, the Bank of Japan responded by increasing in the quantity of its monthly asset purchase programme to 80 trillion yen. While this might ensure deflation remains conquered, as long as the focus is on the monetary base rather than broad money, the substantive effects are likely to remain very limited. As the chart below shows, the Bank of Japanís recent actions provide a thorough refutation of any link between the monetary base and GDP growth.

Tim Congdon, Economic research, macroeconomic forecasting

Contact address: International Monetary Research Ltd., Huntley Manor, Huntley, Gloucestershire GL19 3HQ

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