Japan Lending Surge Meets Deflation Bottleneck: Chart of the Day

The most lending by Japanese banks since May 2009, fueled by record liquidity, has yet to reverse more than a decade of deflation, underscoring the challenge facing the next Bank of Japan governor.

“Just expanding the injection of money won’t help,” said Masamichi Adachi, senior economist at JP Morgan Securities Asia in Tokyo and a former BOJ official. The next governor needs to show how he’ll improve the transmission mechanism by which extra monetary easing translates into rising prices, he said.

The CHART OF THE DAY tracks how the gauge of consumer prices excluding fresh food and energy has been negative every month since January 2009, even as M2 money supply rose to a record. Meanwhile, bank lending excluding trusts in January rose to the most in 3-1/2 years, data compiled by Bloomberg show.

Prime Minister Shinzo Abe, who won election in December around a campaign centered on ending deflation, is likely to pick Asian Development Bank President Haruhiko Kuroda as next central bank governor, according to two officials with knowledge of the discussions. Kuroda said in an interview this month that he favors greater monetary stimulus, and that there are the equivalent of trillions of dollars of financial assets that the BOJ could buy.

The BOJ last month set a 2 percent inflation target, and said it would shift to open-ended asset purchases beginning in 2014. Governor Masaaki Shirakawa, scheduled to step down March 19 after five years at the helm, established a 76 trillion yen ($826 billion) asset-purchase fund and an unlimited bank-loan financing program.

The M2 monetary base is comprised of notes and coins in circulation and also money that financial institutions have on deposit at the central bank. Since Abe took office, the yen has weakened about 9 percent against the dollar, the worst performer among 16 major currencies tracked by Bloomberg.

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