Money Supply Determination Process for Japan

This study re-investigates the money supply determination process for Japan. The methodology of this study, which differs from previous studies, is constructed on the assumption of potential nonlinear (asymmetric) relations between money supply and monetary base via money multiplier. To this aim, the nonlinear autoregressive distributed lag (ARDL) model by Shin, Yu and Greenwood-Nimmo, (2014) is applied. This model allows us to examine the endogeneity and exogeneity of the money supply determination process via the linkage of the money multiplier under expansionary and contractionary monetary policies of the Bank of Japan (BOJ) separately in a nonlinear manner. The main findings of the study indicate that the money supply determination process is endogenous with an unstable money multiplier for Japan for M1. However, this endogeneity in the BOJ’s contractionary monetary policy is more than its expansionary policy. This can be interpreted that the BOJ’s expansionary monetary policy has more of a determining role on money supply determination than its contractionary monetary policy. Additionally, the same findings indicate that the BOJ has more power to determine M1 than M2. This result can be interpreted that when the measure of money broadens the BOJ’s controllability on money supply decreases. In contrast, in our Canadian study (Ongan and Gocer, 2019) with the same nonlinear ARDL model, we concluded that the Canadian central bank (BOC) was able to determine money supply exogenously for M1, unlike the Japanese central bank (BOJ), and the money multiplier was stable for Canada.