Chart of the month
Shinzo Abe returned to power in Japan last December with a commitment to end the country’s long-standing deflationary problem and return the country to growth. Three months later, Bank of Japan Governor Masaaki Shirakawa’s term of office came to an end, and Abe seized the opportunity to appoint Haruhiko Kuroda, a man known to be equally committed to tackling deflation, in his place. “Abenomics” is certainly having an impact. Since December, the yen has fallen sharply and the Tokyo stock market recently hit a five-year high.
Kuroda has said that he wants to organise monetary policy to deliver 2% inflation, and in order to achieve this, he has stated his intention to double the monetary base by the end of 2014. However Kuroda is targeting the wrong money measure if his objective is to restore Japan’s economy to growth. As the chart below shows, there is little correlation between growth in Japanese national income and the monetary base over the last 20 years. The correlation between M3 and national income over this period is a lot better, but Kuroda does not seem to be taking any interest in broad money growth, which has remained fairly sluggish.
So is Japan finally about to turn the corner, or are we going to see yet another false dawn?
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