The unprecedented quantitative easing (QE) program the Bank of Japan launched last year to revive the country's stalled economy could be at risk of failure, Oxford Economics says.
"Economic activity has indeed picked up since the QE program began early last year, but there are now serious warning signs that this progress may not be maintained," Adam Slater, senior economist at Oxford Economics wrote in a report.
The central bank's large-scale asset purchases were designed to boost money supply growth, asset prices and inflation expectations while holding down interest rates. However, broad money growth slowed markedly in recent months and is now negative in real terms, a clear danger sign.
"Higher inflation expectations have done little to boost credit demand so far, as continued aversion to debt among firms and households may be blunting the effectiveness of this channel," he said.
In May, the broadest money supply measure grew just 2.7 percent on year, according to Oxford Economics. With headline inflation running at 3.2 percent in May, real broad money growth is negative.
"This risks generating a significant economic slowdown – a slowdown in real broad money growth was a lead indicator of the downturns in 1998, 2005, 2009 and 2012," Slater said.
Nikkei, yen movements stall
Meanwhile, the impact of monetary stimulus on asset prices is waning. QE aims to boost economic activity through shifting asset prices; for Japan, the two key prices are the stock market and the exchange rate.
"Both of these asset prices have moved the 'right way' as a result of the QE program – stocks are up, and the exchange rate is down. But the big moves were a year ago or more, so the impact is starting to wane," Slater said.
Japan's benchmark Nikkei 225 has declined over 6 percent so far this year, after rising nearly 60 percent last year. The yen, meantime, has appreciated over 3 percent against the U.S. dollar, following 21 percent depreciation last year.