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Japan pandemic policy seen forming financial bubbles

A different kind of crisis: Businesses and consumers manage to inflate savings

Aggressive policies adopted by Japan's government and central bank to help businesses through the pandemic have resulted in piles of unspent money. (Source photos by Akira Kodaka and Masaru Shioyama)

TOKYO -- The amount of cash and deposits held by businesses and consumers in Japan has swelled as the government and central bank open fiscal and monetary spigots wide, hoping to resuscitate an economy sickened by COVID-19.

The Bank of Japan's Money Stock Statistics -- a gauge that tracks the aggregate amount of money, including currency in circulation and deposits, held by nonfinancial corporations, individuals, and local governments -- in June posted its sharpest year-on-year rise since the central bank started using the yardstick.

The coronavirus pandemic has struck the economy with a vengeance, decimating corporate sales and people's income, so it is surprising that, overall, companies and individuals are essentially saving more.

It is a phenomenon not seen in past crises, including the global recession triggered by the collapse of Lehman Brothers in 2008.

The question is not why this is happening but what it will mean to the economy in the post-pandemic world.

A key money stock indicator is M3 money supply, which is composed of cash in circulation plus deposits, including time deposits and fixed and installment savings placed at banks and other financial institutions.

The indicator started growing notably in May. In June, the average balance of M3 surged 5.9% to hit 1.4426 quadrillion yen ($13.4 trillion), its highest point since the BOJ started tracking the index in April 2003.

In particular, easily withdrawn ordinary and current deposits soared 13.2%. Currency in circulation, or bank notes and coins held by individuals and nonfinancial businesses, increased at a brisk 4.7%.

The strong growth of cash and deposits has been driven primarily by the BOJ's and government's aggressive policies designed to help businesses battered by the pandemic finance their daily operations. These policies include measures to promote commercial bank lending to small and midsize companies.

Many smaller companies are availing themselves to the cash that these measures are pushing into the economy. As a result, commercial bank lending has grown sharply. In June, the average loan balance at commercial banks across the nation swelled 6.5%, posting the largest-ever year-on-year rise, according to the BOJ. The government has also provided financial support to consumers, handing out 100,000 yen in cash to every resident in Japan.

Similar trends are taking hold in the U.S. and Europe, where governments have spent heavily to save businesses and individuals waylaid by the pandemic.

Companies tend to build up cash reserves when the economy suffers a serious trauma, but this kind of money stock growth is brand-new.

In the aftermath of the global financial crisis that started in 2008, for instance, Japan's M3 increased by 1% to 2%. The past few months' expansion represents "a rather extreme situation" not observed either during the Lehman shock recession or in other major economic downturns, said Chotaro Morita of SMBC Nikko Securities.

The economic global debacle of 2008 to 2009 began in the financial sector, making it difficult for banks to ramp up lending. In contrast, the current calamity has basically been a crisis of the real economy, with the financial sector remaining mostly unscathed, at least so far.

This means banks maintain their ability to provide funds to businesses and consumers. Companies are, of course, facing growing difficulty in financing their operations, but the situation has not become as bad as during the Lehman recession, according to the BOJ's Tankan business confidence survey for June.

Much more important than the reasons for the robust growth in the money stock are its implications for the course of the economy.

One thing that is clear is this: The swollen money supply is not providing much in terms of economic stimulus, as indicated by plunging economic indicators.

Growing cash and deposits do not give a big boost to the economy unless the money is actually spent. The consumer price index, the key vital sign of the health of the economy, remains weak.

Still, increased cash on hand can help put a floor under an economic downturn by propping up sentiment among businesses and consumers.

Back to our question: What kind of economic effects will this increased stock of money bring after the pandemic comes to an end, buoying corporate sales and people's incomes?

One answer is that Japan's piles of cash will be used to buy things or to pay for business expansions. If this results in significant upward pressure on prices, the BOJ will have an easier time winding down the extraordinary monetary easing policy it has adopted in response to the corona crisis.

But some analysts say the pandemic has poured cold water on people's expectations of economic growth. If this is the case, Japan's stores of cash may flow into stocks and real estate through mostly speculative investments, rather than pump up the real economy.

This would mean inflation can remain subdued, forcing the BOJ to continue its extremely easy money policy for an extended period of time. The situation could set the stage for the forming of financial bubbles.

In recent weeks, the stock market has staged a spirited rally despite the huge blow the outbreak has delivered to the real economy.

Does this mean stock investors believe the second scenario will play out?

No matter how things turn out, the expanded money stock is likely to be a big post-pandemic story for the global economy and financial markets.

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