Developments in the Money Stock in Japan

In Japan, the growth rate of the money stock (M2+CDs) has been relatively high since the latter half of the 1990s, exceeding that of nominal GDP, even when the growth rate of the economy remained generally low and prices continued moderate declines. As a result, the amount outstanding of the money stock reached extremely high levels relative to the size of the economy (i.e., nominal GDP) in Japan. There are two main factors contributing to this. First, while the rate of return on financial assets other than bank deposits dropped significantly, the decline in interest rates on bank deposits, which were approaching close to the zero bound, was limited, thereby making them relatively attractive. And second, in this situation, the Japanese financial system experienced successive disturbances, and as a result significant amounts of funds were shifted to bank deposits, as they were under a blanket guarantee by the deposit insurance system. Recently, the Japanese economy is continuing its recovery process and financial institutions' lending attitude is becoming positive, both inducing increase in the growth of the money stock. However, with the Japanese financial system regaining stability, funds are gradually shifting back from bank deposits to other financial assets, constraining the growth of the money stock. Given this tendency, growth of the money stock is unlikely to accelerate in the near future. Overall, such modest growth of the money stock seems compatible with moderate price increases and sustainable economic growth when the underlying factors described above are taken into account.