An overview of the effects of monetary policy in Japan on GDP and inflation, from 1981 to the present day.

% annual growth rate:

  M3 Nominal GDP
1981 – 2022 3.88% 1.77%
1981 – 1990 9.21% 4.64%
1991 - 2000 2.37% 1.14%
2001 - 2010 1.03% 0.89%
2011 - 2020 2.84% 0.66%

Sources: M3 from the bank of Japan website and nominal GDP from IMF database, as at July 2023.

The medium-term relationship between money and nominal GDP growth in Japan, 1981-2022

Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period

Comment on monetary trends in Japan

In its hyper-growth period, in the 25 years to the late 1970s, Japan often recorded growth in the quantity of money of 20% or so, rather like China in its more recent post-Mao boom. Nominal GDP growth was also rapid, although - again as with China in the last two or three decades - at a somewhat slower pace than that of money. Rather high money growth continued into the 1980s, although the typical growth rate of real output dropped back towards 4% a year.

A marked change in the pattern has occurred since the bursting of the late-1980s asset price bubble in the early 1990s. The banks had a heavy burden of bad debts because loans had been extended to weak and often fraudulent borrowers, and in many cases would have been insolvent if forced to write down loans to their true value. Without a cushion of excess capital, the banks stopped growing their balance sheets. Broad money growth fell to 2.4% a year in the 1990s and to a mere 1.1% a year in the first decade of the 21st century. The change in nominal GDP was correspondingly weaker and, according to the IMF database, nominal GDP went down - if only fractionally - in several years. When decades are compared, the symmetry between the money and nominal GDP movements is impressive. Japan's experience is fully consistent with the monetary theory of national income determination. In the 2010s, 'Abenomics' - attempted to bring about economic recovery by its "three arrows", which includeda programme of 'quantitative easing', whereby central bank asset purchases were intended to boost money growth, but by targeting the monetary base rather than broad money, these measures resulted in only a modest boost to the wider economy.

The fiscal and monetary measures introduced in response to the coronavirus pandemic in 2020 proved more successful in enabling the Bank of Japan finally to reach its 2% inflation target - at least briefly - as annualised quarterly broad money growth rose as high as 16% at one point – unprecedented in recent Japanese monetary history. In mid-2021, consumer prices were still falling, but after restrictions were eased, consumers and businesses spent their accumulated cash, which pushed prices up. However, the scale of the stimulus has been relatively modest compared with the USA, for example, so inflation only rose to 4% and was already falling back by mid-2023.

It is significant that inflation fell back in 2023 without the Bank of Japan raising the cost of borrowing. This strongly suggests that worldwide, inflation fell in 2023 because of the dissipation of the monetary overhang from 2020-21 rather than increases in the cost of borrowing.