Japan: Like Helicopter Money

Published on July 22, 2016

Key Takeaways:

Japan is not about to embark on a policy of helicopter money, meaning a permanent monetization of fiscal spending through direct central bank purchases of government bonds onto the BOJ balance sheet.

What has nevertheless been happening post-election is a movement towards implementation of a badly needed and robust fiscal stimulus package by the Abe government of over 10 trillion yen that we have been expecting, one large enough to require some additional bond issuance.

And the Bank of Japan will, we still expect, for its part announce an increase in its 80 trillion yen annual pace of purchases of government bonds along with other assets at its meeting next week.

That policy coordination, while not representing direct and unlimited monetization of debt, will signal a significant cooperation between the monetary policy and fiscal spending sides, and will look like a de-facto, albeit more limited, version of helicopter money.

July 22, 2016

Dollar yen collapsed yesterday after the release of an interview in which Bank of Japan Governor Haruhiko Kuroda stated the BOJ was not about to embark on a policy of “helicopter money” to perpetually finance government debt directly onto its balance sheet.

The currency pair recovered after it was clarified that the interview was over a month old (and before the visit to Japan by former Fed Chair and scholar of unconventional measures, including helicopter money, Ben Bernanke).

But whether the interview was one month, two months, or a day old, the position of the BOJ and of the cabinet on the direct (and permanent) financing of government bonds has not changed.

While possible, this extreme policy tool, a radical measure that would require a change in the BOJ Public Finance Law laying out the central bank’s independence and the separation of monetary and fiscal policies, is not in the cards.

But before day traders and algos rush out to hit their “Sell All” buttons again, there will be more coordination between the BOJ and the Government.

That will be in the form of more issuance of JGBs and a step up in the pace of those JGB purchases, among other assets such as ETFs, J-REITS, and possibly corporate and local government bonds, by the BOJ. We still do not expect the BOJ for now to cut the deposit rate further into negative territory.

We continue to expect that monetary easing to come at the BOJ meeting on July 28-29, next week.

That, of course, is not “helicopter money,” but it could be said to seem a lot like “something similar to helicopter money” (see SGH 7/7/16, “Japan: Elections, Monetary, and Fiscal Stimulus”).

Contours of the Stimulus Plan

On the stimulus plan itself, there is good news and bad news.

Mainichi and other press outlets in Japan are reporting that the economic stimulus package could be coming in at more than 20 trillion yen in size, which is far more than market expectations.

But that number is a multi-year figure, and the package appears to be, as we expected, at least for 2016, in the 10 trillion plus area – not the advertised 20 trillion, but a robust figure nevertheless.

The size of “pure water,” the amount spent by central and local governments, will be 3 trillion yen, plus (so the supplementary budget for the central government itself will be at 3 trillion yen or slightly lower). Only one trillion yen of that will be financed by the issuance of JGBs.

As to additional economic stimulus, as things stand, it appears 6 trillion yen will be offered in loans to private companies by the Special Account of Treasury Investment and Loans. An additional 6 trillion yen will be a PFI (Private Finance Initiative) for public construction, with subsidies from the Government. And the final 5 trillion yen will be in the form of lending by government financial institutions.

The 20 trillion yen will of course include not only the amounts allocated for FY 2016, but also for FY 2017, and beyond. So there will almost certainly be accusations that the planned economic stimulus package will be a kind of paper tiger, which looks to be fierce but is actually tepid.

We believe it is a fairly robust package nevertheless.

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