Is Currency in Circulation Expanding?
Japan's Money Stock Statistics
Bank of Japan Governor Haruhiko Kuroda, who took office in March 2013, adopted quantitative and qualitative monetary easing with the aim of increasing the amount of currency circulating within Japan. The aim was to vitalize economic activities by increasing the amount of currency, and overcome deflation. Such amounts of domestic currency in circulation are shown in the Money Stock Statistics of the BOJ. Money Stock is basically defined as the quantity of money held by money holders (corporations, households, and local governments including municipal enterprises).
The definition of "Money" is complex and even the BOJ which compiles the statistics says it "differs between countries and time, and cannot be uniquely defined". The current Money Stock Statistics prepares the following four indices. As Chart 1 shows, fluctuations of these four indices each differ.
- M1 = Currency in circulation + deposit money
- M2 and M3 = Currency in circulation + deposits
- Broadly-defined liquidity = M3 + pecuniary trusts + investment trusts + bank debentures + straight bonds issued by banks + commercial paper issued by financial institutions + government securities + foreign bonds
Here, currency in circulation is the sum of banknotes in circulation and coins in circulation. Deposit money is deposits that can be withdrawn easily when necessary as represented by ordinary deposits. Deposits also include quasi-money such as time deposits which become cash upon cancellation.
Thus, M1 is Money which can be most easily used as a method of payment. But Money which is used for analysis of economic activities is M3. This is because how much currency has circulated in all corners of the economy can be observed through bank lending.
Analysis in Combination with Monetary Survey
There are several ways to analyze what economic activity results in fluctuations in M3, and one such method is by using the Monetary Survey also compiled by the BOJ. As previously mentioned, Money Stock is compiled from currencies such as cash and deposits owned by non-financial corporations and individuals. This is an asset for non-financial corporations and individuals, but a liability for financial institutions.
To be more concrete, fluctuations in M3 and Liabilities Other Items is linked with the increase and decrease in monetary institutions' lending. Fluctuations in lending are shown in the following categories: Foreign Assets (Net), Claims on Government (Net), Claims on Other Financial Corporations, Claims on Local Governments, and Claims on Other Sectors. Here, Other Sectors refers to nonfinancial corporations, households and private nonprofit institutions serving households.
Chart 2 shows the breakdown of the fluctuation factors of M3 using the Monetary Survey. Even after Kuroda's monetary easing began, until most recently, growth in M3 was primarily an increase in Claims on Government. But since 2017, there has been a sharp increase in Other Sectors, or in other words, a higher contribution of expanded lending to the private sector. The Japanese economy is once again on a recovery trend since the latter half of 2016, and Chart 2 can be described as showing this economic trend.
Why is This Column Publishing M2?
We have thus identified that fluctuations in M3 are important when looking at economic trends, but we have published M2 in the Statistics Chart of this series. The reasons for that are as follows.
The current Money Stock Statistics were first published in June 2008 (thus the actual values are only available since April 2008). It is a wardrobe-change version of the Money Supply Statistics that were available prior to that. One of the reasons behind the wardrobe-change was the need for revision on the back of the variety of financial products, but the most influential incident was the privatization of postal services in October 2007. With the privatization, Japan Post Bank began its business operations and became treated as a domestic bank under the banking system.
As noted previously, M2 and M3 of the current Money Stock Statistics are the same concepts, but M2 excludes Japan Post Bank. Thus, this is the only indicator that one can continue to watch carrying on from the M2+CD in the old Money Supply Statistics.
This column requires fluctuations in each data to be monitored for a considerable time period. Fluctuations in M3 are limited and can only be grasped after 2010 (since data is only available from April 2008). This is why this column publishes M2.
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|Publication:||Japan Economic Foundation (Tokyo, Japan)|
|Date:||Feb 24, 2018|
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