Over the years we have read many times that the Bank of Japan (BOJ) has rapidly inflated the supply of Yen. The 'pundits' who made such statements were obviously swayed by the numerous announcements of QE programs emanating from Japanese officialdom, but they should have done a little research rather than blindly assume that these QE programs led to large increases in the economy-wide Yen supply.

If they had done the appropriate research they would have discovered that over the past 20 years the annual rate of growth in the Yen supply (Japan's monetary inflation rate) has oscillated in a narrow range around an average of only 2%, and that it is presently near this long-term average. This is illustrated by the following chart. The fact is that of the major currencies, the Yen has had by far the slowest rate of supply growth over the past two decades. That's why the Yen has maintained its purchasing power and why it has been a relatively strong currency on a long-term basis despite the many blatant short-term negatives.

On a side note, the following chart shows that Japan's money supply grew at an average rate of around 10%/year during the boom years of the 1980s and that the money-supply growth rate collapsed during 1990-1991. The monetary transition from the bubble world to the post-bubble world is where comparisons between the US and Japan break down. Whereas Japan's monetary inflation rate tanked after its credit bubble burst, the US's monetary inflation rate moved sharply higher. This is an important part of the explanation for why things never got that bad in Japan and why the much-maligned Japanese economy had stronger real growth over the past 10 years than the US economy. The reality is that monetary inflation damages the economy. The more 'success' that the Fed enjoys in its efforts to maintain a high rate of US$ inflation, the worse things will inevitably get for the US economy.

On another side note, it's too bad that Japan's government went on one Keynesian spending binge after another following the bursting of the credit bubble. If it hadn't gone down this path, wasting resources on a grand scale and racking up an enormous debt in the process, Japan's economy would probably now be in very good shape.