Helicopter Money: Arriving Soon in Japan?
Foreign exchange markets are arguably the quickest to discount changes in economic management, particularly monetary policy. The recent weakening of the yen versus the US dollar has been some of the most profound since the Plaza Accord of September 1985. It suggests, therefore, that foreign exchange markets are expecting a renewed easing of Japanese monetary policy. Since banks’ deposit rates at the Bank of Japan (BoJ) are already in negative territory, and Governor Kuroda presides over a deeply-divided Board of Directors on further cuts, markets are consequently expecting the imminent announcement of so-called helicopter money policies. This involves direct purchases of government debt by the BoJ and …show more content…
Speculation that the BoJ is about to embrace helicopter money policies has been fuelled by recent meetings between the Abe government and senior BoJ staff with former Fed Chairman Bernanke. During his time in academia and at the Fed, former Chairman Bernanke spent much time analysing methods for central banks to deploy in their fight against deflation. He argued that the Federal Open Market Committee (FOMC) should announce a maximum tolerable level for the monetary base should the US ever face the same risks of deeply-embedded Japanese-style deflationary psychology. Furthermore, the FOMC should request from Congress a figure for how much debt could be directly purchased from the Treasury by the Fed, thereby providing some long-term safeguard against the potential emergence of hyper-inflation. What are the chances of helicopter money being introduced into Japan? There is currently a legal constraint under Article 5 of the Public Finance Act that prohibits direct BoJ purchases of government bonds, but it is rumoured that the Abe government is searching for ways to bypass this constraint. Moreover, financial markets are also seemingly excited about the prospect of the BoJ purchasing newly-issued perpetual zero coupon bonds. These would effectively allow the BoJ to print money for the …show more content…
Japan endured a deeply unpleasant experience when the BoJ previously attempted to engage in funding deficit government spending under the directive of Finance Minister Takahashi. High government spending, notably for military purposes, produced rapidly rising inflation. Subsequent attempts to rein in the stimulus by cutting government outlays were, however, thwarted by the very strong and growing power of Japan’s military who ultimately ordered the assassination of the Finance Minister in February 1936. Thereafter, inflation continued to increase, because Takahashi’s successors were reluctant to reduce government funding for fear of incurring the wrath of the military. The rest is history. Currently, these circumstances thankfully do not prevail, but the lesson of the 1930s clearly demonstrates that helicopter money policies can produce higher inflation. What can be produced in the current environment? A scenario whereby the BoJ permanently finances government spending seems unlikely. Rhetorically, the Abe government is committed to reaching a balanced budget by 2020. In the interim, however, the government is likely to stress the virtues of short-term unconventional measures. The most likely route forward for the BoJ will, therefore, be as the sole source of finance for a temporary fiscal boost to the
Foreign exchange markets are arguably the quickest to discount changes in economic management, particularly monetary policy. The recent weakening of the yen versus the US dollar has been some of the most profound since the Plaza Accord of September 1985. It suggests, therefore, that foreign exchange markets are expecting a renewed easing of Japanese monetary policy. Since banks’ deposit rates at the Bank of Japan (BoJ) are already in negative territory, and Governor Kuroda presides over a deeply-divided Board of Directors on further cuts, markets are consequently expecting the imminent announcement of so-called helicopter money policies. This involves direct purchases of government debt by the BoJ and …show more content…
Speculation that the BoJ is about to embrace helicopter money policies has been fuelled by recent meetings between the Abe government and senior BoJ staff with former Fed Chairman Bernanke. During his time in academia and at the Fed, former Chairman Bernanke spent much time analysing methods for central banks to deploy in their fight against deflation. He argued that the Federal Open Market Committee (FOMC) should announce a maximum tolerable level for the monetary base should the US ever face the same risks of deeply-embedded Japanese-style deflationary psychology. Furthermore, the FOMC should request from Congress a figure for how much debt could be directly purchased from the Treasury by the Fed, thereby providing some long-term safeguard against the potential emergence of hyper-inflation. What are the chances of helicopter money being introduced into Japan? There is currently a legal constraint under Article 5 of the Public Finance Act that prohibits direct BoJ purchases of government bonds, but it is rumoured that the Abe government is searching for ways to bypass this constraint. Moreover, financial markets are also seemingly excited about the prospect of the BoJ purchasing newly-issued perpetual zero coupon bonds. These would effectively allow the BoJ to print money for the …show more content…
Japan endured a deeply unpleasant experience when the BoJ previously attempted to engage in funding deficit government spending under the directive of Finance Minister Takahashi. High government spending, notably for military purposes, produced rapidly rising inflation. Subsequent attempts to rein in the stimulus by cutting government outlays were, however, thwarted by the very strong and growing power of Japan’s military who ultimately ordered the assassination of the Finance Minister in February 1936. Thereafter, inflation continued to increase, because Takahashi’s successors were reluctant to reduce government funding for fear of incurring the wrath of the military. The rest is history. Currently, these circumstances thankfully do not prevail, but the lesson of the 1930s clearly demonstrates that helicopter money policies can produce higher inflation. What can be produced in the current environment? A scenario whereby the BoJ permanently finances government spending seems unlikely. Rhetorically, the Abe government is committed to reaching a balanced budget by 2020. In the interim, however, the government is likely to stress the virtues of short-term unconventional measures. The most likely route forward for the BoJ will, therefore, be as the sole source of finance for a temporary fiscal boost to the