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The Bank of Japan’s (BoJ) long-standing quantitative (1)easing dates back to the early 2000s and has, at times, driven annual growth in the monetary base (2)M0 to over 50%. Despite this, growth rates across broader monetary aggregates, such as (3)M2, have remained relatively weak, sitting below 4% until the start of the year. Since the onset of the Covid-19 crisis, M2 has been surging and in August its growth rate reached 8.6%, its highest level in three decades.
As is the case elsewhere, the surge is largely down to central bank action as the BoJ has stepped up the pace of its asset purchases. The difference is that it has been accompanied by a sharp acceleration in private sector loans and deposits. This is most likely due to economic agents seeking liquidity as a refuge from economic uncertainty. If, however, money supply and credit levels continue to grow at high rates, this is a significant shift for the Japanese economy, and along with it comes potentially higher inflation.
(1) Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
(2) The monetary base M0 includes the total supply of currency in circulation in addition to the stored portion of commercial bank reserves within the central bank.
(3) M2 corresponds to M1 (coins and banknotes in circulation and overnight deposits) + passbook deposits and short-term loans.
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The opinion expressed above is dated 18th September 2020 and is liable to change.
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