Money is more available than needed by economic activity.
The Marshallian k. indicator, the ratio of cash in circulation and deposits plus certif- icates of deposit to the nominal gross domestic product, has been rising far above its trend line since 1980, indicating that money in circulation is not properly fueling economic activity.
A closer look reveals that time deposits are decreasing while highly liquid, short-term deposit currency — such as demand deposits — are increasing noticeably along with certificates of deposit.
Interest-bearing government bonds worth 25.6 trillion yen will be redeemed this fiscal year, up 63.3 percent over last year. Some 10 trillion yen in fixed-amount postal savings will fall due next month alone.
Given the massive redemption of those long-term fixed funds, the growth of funds not for immediate use is expected to continue.
A similar situation took place in 1987, when surplus funds were lent to corporations to cover their “zaitech” financial engineering. This helped lift stock prices as the funds flowed into the stock market through fund trusts.
Japan’s stock market was similarly filled with liquidity in 1972. This time, however, surplus funds are unlikely to flow immediately into the stock market as financial engineering is hardly working. Nevertheless, the funds are expected to steadily prop up demand for stocks.
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