World Economy

Japan Needs $28b to Avoid Further Contraction

Japan Needs $28b to  Avoid Further ContractionJapan Needs $28b to  Avoid Further Contraction

Japan needs an economic injection of as much as ¥3.5 trillion ($28 billion) to shore up consumption and stave off further economic contraction, said Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe.

Just as the Bank of Japan most needs to revive a contracting economy, the effectiveness of its monetary policy is at a record low. The money multiplier, a gauge of activity generated when the central bank eases, fell to 3.92 last month, the lowest in data dating back to 2003, Bloomberg reported.

That’s even as BOJ debt purchases of as much as ¥12 trillion ($97 billion) a month caused the monetary base to balloon about 150%. The phrase “pushing on a string” was adopted during the 1930s Great Depression to describe the difficulty in reviving demand with fund injections.

“Money isn’t flowing into the real economy, it is just moving between the BOJ and banks as Japanese government bonds are transferred to the BOJ’s excess reserves,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “The main spill-over effect from the unprecedented easing is to lower long-bond yields and a weaker yen.”

The world’s third-largest economy contracted last quarter as a slump in private-sector demand coincided with declining exports, further challenging BOJ Governor Haruhiko Kuroda’s efforts to meet the 2% inflation target with record stimulus. The benchmark 10-year JGB yield is heading for its first quarterly drop since December, declining eight basis points to 0.37% since June 30, amid expectations the monetary authority will have to pare its economic forecasts.

 Fall in Lending

The money multiplier is derived by dividing the money stock representing funds that are circulated in the economy by the monetary base, which is the liquidity the BOJ pumps into the financial system.

The monetary base grew 2.5 times through July since November 2012, a month before Prime Minister Shinzo Abe took office, vowing to pursue reflationary policies to end deflation. That far outstripped the 8.5% increase in the money supply to more than one quadrillion yen in the period.

The proportion of lending to deposits is also falling, signaling that money is not filtering widely through the economy. The rate stood at 0.67 in July, near a record low 0.66 touched in May, according to Bloomberg-compiled data based on BOJ figures.

Longer-dated Japanese government bonds have risen along with global bonds amid concerns that China’s economic slowdown would weigh on other economies and depress commodity prices.

 Faltering Growth

Japan’s gross domestic product fell an annualized 1.6% in the April-June period, ending two quarters of growth.

The data added to doubts about the BOJ’s ability to foster stable 2% inflation by the end of its target period in September 2016.

“The GDP data may have bolstered the case for additional easing,” said Hideo Kumano, an economist at Dai-ichi Life Research Institute and a former BOJ official. “No matter how much the BOJ boosts the monetary base, money stock isn’t growing much. The problem is that money isn’t spent to take investment risks.”

Despite low interest rates and record corporate profits, capital investment is lagging due to slack domestic demand, said Toru Suehiro, an economist at Mizuho Securities Co.

“The BOJ is likely to revise down the growth outlook in its report in October and ease further at the same time or in January,” he said. “There are tailwinds for the JGB market.”

Suehiro said he expects the 10-year JGB yield to stabilize around 0.4% to 0.5%.

The effectiveness of monetary policy is conditional on various government measures aimed at expanding the economy, said JPMorgan’s Yamawaki.

Japan’s export growth slowed in July, a sign that foreign demand is failing to provide much support to the economy, government data Wednesday showed.