My view is that looking at Japanese M1 data, or any Japanese financial data for that matter, is not very illuminating, becasue as you suggested, so much of Japanese transaction or the avoidance of tranaction is not officially recorded.
It is interesting to read the following report between the lines. The terms employed have very differnet meanings than American deliberations. Take for example: "Overall economic developments require careful monitoring in consideration of the above points. It is also important to prepare an environment for a smooth structural reform that assures the economy's sustained growth in the medium term." Thses sentences mean that Japn is going to do it its way- an environment for smooth structural reform.
Monthly Report of Recent Economic and Financial Developments based on data and information available when the Bank of Japan Monetary Policy Meeting was held on April 9, 1999 :
Japan's economy, at present, appears to have stopped deteriorating. With regard to final demand, business fixed investment has been declining, and recovery in private consumption continues to be weak on the whole. Net exports (exports minus imports) are leveling off. Housing investment has started recovering, and public works orders are increasing considerably. Reflecting such development of final demand and progress in inventory adjustment, industrial production has stopped decreasing. The deterioration in corporate and consumer sentiment seems to have ceased, due to this economic situation as well as the subsidence of the public's anxiety about the stability of Japan's financial system. However, corporate profits remain weak, and employment and household income conditions continue to deteriorate. In corporate finance, firms' concern about the availability of funds in the future is gradually abating, but has not completely disappeared. As for the outlook, with the progress in inventory adjustment gradually paving the way for a recovery in production, the government's economic measures and the monetary easing by the Bank will underpin the economy. In addition, the anxiety about the stability of the financial system is easing against the background of the injection of public funds into banks, and stock prices are recovering. These improvements in the financial environment are also expected to exert positive effects on the economy gradually. With respect to corporate activities, however, firms have started taking steps toward full-scale restructuring, facing the continued decline in profits and strongly becoming aware of a need to improve their balance sheet. Although such corporate restructuring is expected to improve productivity, it may, in the short run, reduce fixed
investment and discourage household expenditure through the resulting deterioration in employment and income conditions. Under such circumstances, it is still difficult to expect an immediate, self-sustained recovery in private demand. Overall economic developments require careful monitoring in consideration of the above points. It is also important to prepare an environment for a smooth structural reform that assures the economy's sustained growth in the medium term. With regard to prices, reflecting the large output gap, domestic wholesale prices are on a downtrend, and corporate service prices are weakening. Consumer prices also remain weak. In relation to price developments in the future, distinct narrowing in the output gap is unlikely for the time being even though the economy appears to have stopped deteriorating. Furthermore, the decline in wages is likely to continue exerting downward pressure on prices. Hence, prices are expected to remain on a downtrend. In the financial markets, the overnight call rate has stayed at nearly zero, and financial institutions' anxiety about the availability of liquidity has rapidly subsided. With the injection of public funds, the Japan premium has almost disappeared, and interest rates on term instruments have been at a low level. The amount outstanding of funds in the call money market, after showing a recovery toward the previous fiscal-year end, has been decreasing again since the beginning of the new fiscal year, as institutional investors shifted part of their funds to highly-liquid deposits of banks. Although the shrinkage of the market has not led to any difficulty in funds settlement, close attention should be paid to the market development. Long-term interest rates are declining gradually reflecting sluggish credit demand in the private sector. Stock prices have been firm against the background of the market's appreciation of moves toward corporate restructuring and the rise in U.S. stock prices. With regard to corporate finance, credit demand for economic activities such as fixed investment remains weak. Firms' moves to increase their on-hand liquidity in the face of difficult fund-raising conditions are settling down. Private banks have basically retained their cautious lending stance, facing the worsening performance of borrower companies. However, severity in their fund-raising conditions has been alleviated, and their insufficient capital base has been increased. Under these circumstances, it seems that banks have started to extend loans more actively than before especially for projects involving relatively small credit risks. As a result, credit conditions, which tightened previously, are now easing somewhat. It should be noted, however, that firms with relatively low credit ratings remain under severe financing conditions. The situation continues to warrant careful monitoring on the extent to which private banks will ease their lending stance, and how the change will affect firms' propensity to invest. (End)
As for the internationalization of the Yen, you are correct that Japan has an uphill fight. But note the following:
Statement by Masaru Hayami, Governor of the Bank of Japan, Concerning the Bank's Semiannual Report on Currency and Monetary Control before the House of Councilors Committee of Financial Affairs, December 10, 1998 and before the House of Representatives Committee of Finance, December 11, 1998:
Japan needs to act expeditiously to carry out further restructuring and development of its financial markets, which I believe will make the yen easy to use, domestically and internationally, and thus contribute to bringing about a truly "internationalized" yen. Full statement: http://www.boj.or.jp/en/seisaku/99/seisak_f.htm
Henry C.K. Liu
Greg Nowell wrote:
> Henry:
>
> Thanks for your exposition on Japan. It conforms with
> much I have read elsewhere. A couple of questions and
> comments.
>
> 1. Roy C. Smith in his book on US banking, "Comeback,"
> has a long section on Japan and mentions that the
> Keiretsu are themselves the major banks of Japan and in
> turn have special relationships with the Bank of
> Japan. He furthermore mentions that the Bank of
> Japan's short term loans to the keiretsu were something
> like 125% of deposits, which he doesn't explain in any
> detail. Nonetheless, my interpretation is that much of
> the "normal growth" of M1 in the Japanese system is
> handled through discount loans to the keiretsu banks
> which pass these through to their subsidiaries. By
> contrast, in the U.S. system, M1 growth is typically
> handled through the "open market" purchase of
> securities which does not favor any particular
> industrial/banking group as such markets are vast,
> deep, with many players. Discount window operations
> are much more limited in the US. Another implication
> of your (and R Smith's) analysis is that a lot of
> industrial financing is carried out with short term
> loans that are continually "rolled over." This
> suggests that projects can be financed at lower cost,
> as short rates are generally lower than long ones.
> Comments?
>
> 2. Your optimism about the future of the Japanese Yen
> is I think overtstated. If this were a gold economy,
> yes, the Yen would be on its way. But in the non-gold
> era the "asset" underlying the Japanese trade surplus
> is the U.S. dollar, which is a liability of the US
> central bank (and the economy as a whole). To make the
> matter short: if the US economy dollar tanks so too do
> all the dollar denominated assets in Japanese banks.
> I don't think you could have a collapse of the US
> dollar without collapsing the substnatial assets which
> play a major role in the Japanese banking system.
> Comments?
>
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
>
> Fax 518-442-5298