On Tuesday I have to present my work on the Japanese Deflation and still have some questions.
In the second half of the 1980s the Japanese central bank, increased the money supply, artificially lowered interest rates and created a boom. When the BOJ increased interest rates in 1989 the boom turned to bust.
According to the graph: Before the crash, M3 increased at about 4% per year. When the bust occurred, M3 actually fell 4%. Hence, there was a contraction in the money supply. Until 1994, M3 continued to fall, though at lower rates. There’s a strong correlation between the inflation rate and CPI rate. But the graph makes it look as is the money supply has decreased since 2000. However, the BOJ has increased the money supply and lowered interest rates to 0.
This is M2: http://www.tradingeconomics.com/japan/money-supply-m2
I couldn’t find other graphs for M3.
So has M3 increased or decreased over the last decade?
The money stock in a country is money proper plus money substitutes, i.e., on demand at par redemption claims for money.
In the U.S., the most accurate official measure of the money stock is MZM, i.e., money of zero maturity. M1 is too narrow (it doesn’t include all on demand at par redemption claims) and M2 is too broad (it includes credit instruments) and M3 has been discontinued.
Movements in M2 and M3, then are capturing part of the credit expansion instead of monetary inflation.
Here is the Bank of Japan statistics on M2 and M3 from 1980 to the present: