<blockquote>
<p>Will the same chart plotted in the decades after 1980 show a huge divergence between the quantity of money per unit of output and the consumer price index? [&quot;huge&quot; here means that the apparent correlation would seem non-existent].</p>
</blockquote>
<p>This is how the series looks like with new data provided by Fred. Fred provides some of the data only from the 90s. The dataset used are <a href="https://fred.stlouisfed.org/series/MYAGM2JPM189S" rel="nofollow noreferrer">M2 for Japan</a>, <a href="https://fred.stlouisfed.org/series/JPNRGDPEXP" rel="nofollow noreferrer">Real Gross Domestic Product for Japan</a> and <a href="https://fred.stlouisfed.org/series/JPNCPIALLMINMEI" rel="nofollow noreferrer">Consumer Price Index of All Items in Japan</a>.</p>
<p>As you can see the relationship still held by the late 90s but then there was divergence after 1998. However, the Pearson correlation coefficient is 0.02 and not significantly different from zero in the sample.</p>
<p><a href="https://i.sstatic.net/JJE2V.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/JJE2V.png" alt="enter image description here" /></a></p>
<blockquote>
<p>If so, what are the reasons for this unexpected divergence where the prices don't increase with the increasing quantity of money?</p>
</blockquote>
<p>Ever since banking crisis in 1997 (when the divergence started) there was declining velocity of money in Japanese economy. Using the quantitative theory of money price level is given by: <span class="math-container">$$P = \frac{M}{Y} V$$</span></p>
<p>Friedman assumed that <span class="math-container">$V$</span> is more-or-less fixed because empirical observations at his time showed that it is usually fixed. That's why Friedman plotted <span class="math-container">$P$</span> against <span class="math-container">$\frac{M}{Y}$</span>, because if <span class="math-container">$V$</span> is fixed then all variation in <span class="math-container">$P$</span> should be explained by <span class="math-container">$\frac{M}{Y}$</span>.</p>
<p>That held up to about 1997 when the velocity of money in Japanese economy started to rapidly decline (see <a href="https://www.imes.boj.or.jp/research/papers/english/11-E-16.pdf" rel="nofollow noreferrer">Sudo 2011</a>). As for what caused the decline in velocity of money there could be multiple reasons. Changing liquidity constraints, rapidly aging population etc.</p>
<blockquote>
<p>Does it mean that people continue to hoard increasing quantities of
money in their bank accounts and prefer not to spend it?</p>
</blockquote>
<p>They do not necessarily hoard it in their bank accounts, some more old fashioned people might do it under a mattress but yes.</p>

CC BY-SA 4.0
2022-06-16T07:18:30.613Z
Thank you for a most enlightening answer! 
Ritesh Singh
CC BY-SA 4.0
2022-06-15T23:03:37.223Z
2022-06-15T23:03:37.223Z
1muflon1
<p>Milton Friedman, in <a href="https://www.youtube.com/watch?v=NgSqZKx0mNI" rel="nofollow noreferrer">one of his talks</a> in 1980, showed a series of examples to illustrate his statement that inflation was a monetary phenomenon.</p>
<p>One of the examples he used was Japan. The following chart appears in his talk (please forgive the bad resolution):</p>
<p><a href="https://i.sstatic.net/clsAQ.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/clsAQ.png" alt="Japan: quantity of money per unit of output and the consumer price index" /></a></p>
<ol>
<li><p>Will the same chart plotted in the decades after 1980 show a huge divergence between the quantity of money per unit of output and the consumer price index? [&quot;huge&quot; here means that the apparent correlation would seem non-existent].</p>
</li>
<li><p>If so, what are the reasons for this unexpected divergence where the prices don't increase with the increasing quantity of money? Does it mean that people continue to hoard ever increasing quantities of money in their bank accounts and prefer not to spend it?</p>
</li>
</ol>

<inflation><monetary-policy><money-supply><money><japan>
Japan: Will the quantity of money per unit of output and the consumer price index show a huge divergence in the decades after 1980?
Ritesh Singh
# Japan: Will the quantity of money per unit of output and the consumer price index show a huge divergence in the decades after 1980?

(Asked by: username_0 on 2022-06-15)

Milton Friedman, in [one of his talks](https://www.youtube.com/watch?v=NgSqZKx0mNI) in 1980, showed a series of examples to illustrate his statement that inflation was a monetary phenomenon.

One of the examples he used was Japan. The following chart appears in his talk (please forgive the bad resolution):

[![Japan: quantity of money per unit of output and the consumer price index](https://i.sstatic.net/clsAQ.png)](https://i.sstatic.net/clsAQ.png)

1. Will the same chart plotted in the decades after 1980 show a huge divergence between the quantity of money per unit of output and the consumer price index? ["huge" here means that the apparent correlation would seem non-existent].
2. If so, what are the reasons for this unexpected divergence where the prices don't increase with the increasing quantity of money? Does it mean that people continue to hoard ever increasing quantities of money in their bank accounts and prefer not to spend it?

**Tags:** inflation, monetary-policy, money-supply, money, japan

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## 1 answers

### Answer by username_1 on 2022-06-15. Score: 1 | Accepted answer

> Will the same chart plotted in the decades after 1980 show a huge divergence between the quantity of money per unit of output and the consumer price index? ["huge" here means that the apparent correlation would seem non-existent].

This is how the series looks like with new data provided by Fred. Fred provides some of the data only from the 90s. The dataset used are [M2 for Japan](https://fred.stlouisfed.org/series/MYAGM2JPM189S), [Real Gross Domestic Product for Japan](https://fred.stlouisfed.org/series/JPNRGDPEXP) and [Consumer Price Index of All Items in Japan](https://fred.stlouisfed.org/series/JPNCPIALLMINMEI).

As you can see the relationship still held by the late 90s but then there was divergence after 1998. However, the Pearson correlation coefficient is 0.02 and not significantly different from zero in the sample.

[![enter image description here](https://i.sstatic.net/JJE2V.png)](https://i.sstatic.net/JJE2V.png)

> If so, what are the reasons for this unexpected divergence where the prices don't increase with the increasing quantity of money?

Ever since banking crisis in 1997 (when the divergence started) there was declining velocity of money in Japanese economy. Using the quantitative theory of money price level is given by: $$P = \frac{M}{Y} V$$

Friedman assumed that $V$ is more-or-less fixed because empirical observations at his time showed that it is usually fixed. That's why Friedman plotted $P$ against $\frac{M}{Y}$, because if $V$ is fixed then all variation in $P$ should be explained by $\frac{M}{Y}$.

That held up to about 1997 when the velocity of money in Japanese economy started to rapidly decline (see [Sudo 2011](https://www.imes.boj.or.jp/research/papers/english/11-E-16.pdf)). As for what caused the decline in velocity of money there could be multiple reasons. Changing liquidity constraints, rapidly aging population etc.

> Does it mean that people continue to hoard increasing quantities of
> money in their bank accounts and prefer not to spend it?

They do not necessarily hoard it in their bank accounts, some more old fashioned people might do it under a mattress but yes.

> **Comments:**
> **username_0**: Thank you for a most enlightening answer!   

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