Helicopter Money Speculations Continues to Weigh on Yen
"It's Prohibited By Law" - A Problem Emerges For Japan's "Helicopter Money" Plans
Over the past four days, risk assets have been on a tear, led by the collapsing Yen and soaring Nikkei, as the market has digested daily news that - as we predicted last week - Bernanke has been urging Japan to become the first developed country to unleash the monetary helicopter, in which the central banks directly funds government fiscal spending, most recently with an overnight report that Bernanke has pushed Abe and Kuroda to sell perpetual bonds, all of which would be bought by the BOJ.
There may be a very big problem with what the market is pricing in, however. As Reuters reports, citing government and central bank officials directly involved in policymaking, "there is no chance Japan will resort to helicopter money." The problem: it is prohibited by law to directly underwrite government debt, which means parliament needs to revise the law for the central bank to start directly bank-rolling debt.
"Adopting helicopter money in the strict sense is impossible as it's prohibited by law," said one of the officials. "If it's about the BOJ buying huge amounts of bonds and the government deploying fiscal stimulus, we're already doing that."
With the BOJ already keeping borrowing costs near zero with aggressive money printing, as the central bank already gobbles up more government bonds than is sold to the market each month under its massive monetary stimulus program, there is no strong push from premier Shinzo Abe's administration to revise the law and force the central bank to resort to helicopter money, said the officials, who declined to be named due to the sensitivity of the matter.
While hardly a hurdle to Bernanke, the reality is that for Japan to adopt helicopter money, Abe would need to change the fundamental laws of central bank independence, and many are already rising up against this prospect. "It's an illusion to think that a country can spend as much money as it wants, without having to pay it back," said another official on condition of anonymity.
"I haven't heard of any such discussions taking place in the Ministry of Finance," a third source said, adding that adopting helicopter money was "unthinkable."
One can probably discount what BOJ Governor Haruhiko Kuroda said when he dismissed the idea of helicopter money, stressing the central bank is buying bonds not to finance debt but to hit its 2 percent inflation target: recall that Kuroda said just one week before Japan unveiled NIRP that no NIRP would come to Japan, which certainly dilutes any credibility he may have.
However, the dissent to Bernanke's plan has spread far and wide, spreading as far as Abe's cabinet.
Masahiko Shibayama, an influential aide to Abe, voiced caution over helicopter money involving the issuance of perpetual bonds.
Koichi Hamada, another key economic adviser to Abe, told Reuters on Thursday Japan should not resort to helicopter money as it could lose control of inflation. "Resorting to such a step would be sending a grave message to the international community" on Japan's fiscal management, he told Reuters on Thursday. "We need to think carefully about how markets will react if we even signal it as an option."
Worse, quoted by the WSJ, Hamada hinted at what we have said all along: helicopter money would be the precursor to hyperinflation.
Japan shouldn't make its central bank directly underwrite government borrowing, or it could suffer the kind of runaway spending and inflation that followed a similar move in the 1930s, said Hamada.
"It would be too tempting for politicians. They wouldn't give it up once you made it possible for them to print and spend as much money as they please, either for political purposes or for their own ambitions," said Koichi Hamada in an interview with The Wall Street Journal recently.
The stern warning from the Yale University professor comes as economists increasingly speculate that Mr. Abe may resort to the radical step to save his campaign to escape deflation, a negative cycle of price falls. Mr. Abe's recent pledge to bolster spending and his meeting earlier this week with former Federal Reserve Chairman Ben Bernanke, an advocate of monetization, has fueled such speculation.
Which is not to say that helicopter money is impossible. Supporters of the measure, known as "helicopter money," view it as the quickest, surest way to stimulate demand and create the 2% inflation wanted by Mr. Abe. But the problem is that politicians may not have the self-discipline to withdraw the policy before it destabilizes the economy, Mr. Hamada said, playing down a recent local newspaper report that portrayed him as supportive of helicopter money.
"There is a huge risk that fiscal expansion would get out of control" if the Bank of Japan started underwriting government borrowing, Mr. Hamada said.
The adviser called attention to the consequences of debt monetization in the 1930s by finance minister Korekiyo Takahashi. Mr. Takahashi's powerful stimulus helped the nation escape the Great Depression, but Mr. Hamada said it opened the door to aggressive military spending that later caused sky high inflation.
Mr. Takahashi was assassinated by rebel officers in 1936.
Other aides to Mr. Abe, including Japan's ambassador to Switzerland Etsuro Honda, see Mr. Takahashi as a national hero and put the blame for spiraling spending and inflation squarely on the military and capacity shortages in a war-torn economy.
For now, the reality is that with a political gate to helicopter money, the best Japan can hope for is to jawbone the Yen and markets higher; however for Abe to actually change the law a far more drastic deterioration in Japan's inflationary picture will have to emerge.
Renewed debate over helicopter money underlines the continued radicalization of discussions over how to remedy Japan's lost two decades. It also reflects frustrations over the limited effects so far of Abenomics.
Hamada agreed that expanding fiscal and monetary policies at the same time is likely to produce stronger stimulus effects than implementing them in isolation. But Mr. Hamada said that if the BOJ continues to buy debt from the markets, not directly from the government, the policy coordination wouldn't amount to monetization by strict definition.
Speaking of the BOJ's coming policy decision on July 29, Mr. Hamada said he "can't say with absolute certainty for now" whether the central bank should undertake additional easing. "It depends on how much stock prices will have recovered and how much the yen's upward momentum will have weakened by then," he said.
However, that goes back to problem #1 for Japan: it has insufficient bonds to monetize, forcing the BOJ to increasingly soak up ETFs and other non-debt instruments. As such, continuing with merely more QE will lead to even lower record JGB rates, sending even more acut deflationary signals to the local and global economy, and forcing Japanese investors to buy even more record amounts of offshore debt.
Mr. Hamada said policy decisions are up to Mr. Kuroda to make, but added that Japan's tightening labor market means that officials don't need to debate the need for action at every meeting. He also urged Japanese companies to stop expecting too much from the BOJ and instead to put their savings to better use, by investing more or offering sharper pay raises.
"I am wondering if those corporate managers...understand that they are a drag on the Japanese economy," Mr. Hamada said.
They do, however with the help of such "experts" as Kuroda and Bernanke, they have every reason to believe that the punch bowl will not only not be taken away but will be spiked even more. This time, however, that may not happen.
Japan economy minister Ishihara declines to comment on market levels
There would have to be less sweating in Japan now that the yen has weakened a bit since the election result.
Japan may be on route for a "soft" form of helicopter money
Japanese policymakers, who won't go as far as funding government spending through direct debt monetization, might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, say sources familiar with the matter.
In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what's called "helicopter money", where a central bank directly finances budget stimulus through programs such as perpetual bonds.
With Prime Minister Shinzo Abe preparing a big spending package to be announced as early as this month, the Bank of Japan will remain under pressure to expand monetary stimulus at its rate review on July 28-29, analysts say.
Government and central bank officials say there is no chance Japan will resort to having the central bank monetize debt to fund government spending, such as by buying perpetual bonds to allow the government to boost spending without paying back debt.
"It's clear the government won't do helicopter money in the strict sense," said a government official with knowledge of deliberations on what action to pursue.
"But it's a different story when you're talking about combining fiscal and monetary expansion. That's possible," said the official, who insisted on anonymity.
Speculation that Japan was considering helicopter money ignited this week after former Federal Reserve Chairman Ben Bernanke met Abe and BOJ Governor Haruhiko Kuroda during a private visit to Tokyo.
Helicopter money was coined by American economist Milton Friedman and gained market prominence when Bernanke cited it in a 2002 speech as a way central banks might finance government budgets directly to fight deflation.
Sources told Reuters that Bernanke told Abe there were "various tools left available" for monetary policy - a view shared by Kuroda. And people close to the governor say he would not hesitate to pull the trigger on further easing if needed to beat deflation.
With prices falling on soft consumption and inflation expectations weakening, the BOJ could justify further stimulus as a necessary step to reach its 2 percent inflation goal.
"It's true good coordination of monetary and fiscal policy is very important for Abenomics," another source said.
But Kuroda, a well-known fiscal hawk, may be reluctant to ease now for fear of markets seeing that as a sign the central bank is monetizing debt, which could weaken its credibility. After the July meeting, the BOJ next reviews policy Sept. 20-21.
Yen off six-week low after 'helicopter money' mania shot down
The yen hovered above six-week lows in early Asian trade on Friday after comments from Bank of Japan Governor Haruhiko Kuroda dented speculation Japan may be preparing a radical "helicopter money" economic stimulus.
The yen bounced back to 105.88 yen per dollar from 107.49, its six-week low against the U.S. currency touched on Thursday.
The rebound was triggered by Kuroda's comments on a BBC Radio 4 interview playing down the idea of helicopter money, essentially a policy of injecting cash directly to the economy by printing money in some form.
With Prime Minister Shinzo Abe crafting a massive spending package worth about $190 billion to bolster the economy, some speculators had bet the BOJ could be financing the additional spending - likened by economists to dropping large amounts of cash from a helicopter.
The BBC later said its interview with Kuroda had been conducted in mid-June, helping to cool the yen's gains, though his comments provided good opportunities for those who had been betting on BOJ stimulus to take profits and selling yen.
"I doubt one would change their (the BOJ's) basic thinking in just one month. But on the other hand, it is true that the market is still somehow wary of the possibility the BOJ may open the Pandora's Box next week," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
The BOJ will hold a policy review on Thursday and Friday next week.
The euro was little changed against the dollar, surrendering most of its gains from European Central Bank President Mario Draghi's comments that the bank would take time to reassess any changes in the economic outlook.
The ECB held off on any immediate further easing of monetary policy on Thursday, as expected.
Kuroda: There are different definitions of helicopter money
Kuroda spoke to reporters at the G20, just a few days ahead of the July 29 Bank of Japan decision.
- BOJ will add stimulus if needed
- Japan is in a gradual recovery phase
- Japan's virtuous economic cycle is continuing
- Direct underwriting of debt banned in developed world
Meanwhile, a separate official said G20 talks with the US's Lew didn't discuss FX much.
The different definitions of helicopter money was one of the things I highlighted.
What is it?
- Dropping money from a helicopter
- Depositing money into citizen's accounts
- Monetizing debt
- Pledging to maintain/increase QE holdings for 100+ years and issuing the govt zero-coupon bonds
The last one, to me, is the same thing because it gives the government a huge amount of money to spend that will never be paid back. But there's no strict definition of helicopter money.
Last week, USD/JPY took a spill in Europe after an interview with Kuroda ruled out helicopter money. The 120 pips fall bounced after it was revealed the comments were recorded more than a month ago.
In my humble opinion Japanese people behave very strange and foolishly. They lower the national currency in order to remain competitive with other countries in trade markets, while the price on energy increases much more quickly than the devaluation is. Why do they do it nowadays, I do not understand
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The yen has continued to weaken in the Asian trading session lifting USD/JPY back above the 105.00-level. The next key resistance level comes in just below 106.50 where the 55-day moving average is located.
The reversal of yen strength in part reflects the ongoing improvement in global investor risk sentiment as Brexit vote fears that it could trigger global financial market instability have not materialized. Global yields have adjusted lower in part in anticipation of weaker growth and looser monetary policy. Investors’ search for ever dwindling yield has acted to support global equity markets lifting notably US indices to record highs this week. As a result safe haven and speculative demand for the yen has eased in the near-term.
The yen’s appeal has been undermined as well by building speculation that the BoJ could adopt more aggressive monetary policy easing. Such speculation has been encouraged further overnight by comments from Etsuro Honda, a key advisor to Prime Minister Abe, who has stated that former Fed Chairman Bernanke told him when they met back in April that helicopter money could work as the strongest tool to overcome deflation in Japan. The Bloomberg report suggests that the form of helicopter money discussed involved the government issuing non-marketable perpetual bonds with no maturity date which the BoJ could purchase directly. It is understandable that long yen positions are being scaled back in the near-term although there has been no strong signal from Japanese policymakers that helicopter monetary is required at the current juncture. However, there is building evidence that serious policy discussion is moving in the direction of helicopter money in Japan which if implemented would weigh more heavily on the yen further down the road.
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