The Bank of Japan’s (BOJ) review of its monetary stimulus program promised for September has revived expectations it could adopt some form of “helicopter money,” printing money for government spending to spur inflation.
The bank on Friday disappointed market hopes that it might increase its heavy buying of government debt or lower already negative interest rates, cementing the view that it is running out of options within its existing policy framework to lift prices and end two decades of deflationary pressure.
With little to show for three years of massive monetary easing, economists say bank Governor Haruhiko Kuroda’s “comprehensive assessment” of policy could push it into closer cooperation with Japanese Prime Minister Shinzo Abe, who announced a fiscal spending package worth more than ￥28 trillion (US$275 billion) on Wednesday in a bid to kick-start growth.
“The comprehensive review might be the first step toward further collaboration with the government, hinting at helicopter money,” UBS Securities economist Daiju Aoki said.
“The government could issue 50-year bonds and if the BOJ makes a commitment to hold them for a very long time, that would be like helicopter money,” he said.
The helicopter money metaphor for the aggressive printing of new money was first used by US economist Milton Friedman in 1969 and cited by former US Federal Reserve chairman Ben Bernanke in 2002 as a scheme that could fight deflation.
However, some economists fear it could trigger hyperinflation and uncontrollable currency devaluation.
Speculation that Japan might take that path reached fever pitch earlier last month when Bernanke met Abe and Kuroda in Tokyo, though policymakers quickly tried to damp down such talk.
In the narrowest sense, a government can arrange a helicopter drop of cash by selling perpetual bonds, which never need to be repaid, directly to the central bank.
Economists do not expect this in Japan, but they do see a high chance of mission creep, with the BOJ perhaps committing to buy municipal bonds or debt issued by state-backed entities, giving its interventions more impact than in the treasury bond market, where it is buying ￥80 trillion a year of Japanese government bonds from financial institutions.
“Compared with government debt, these assets have low trading volume and low liquidity, so BOJ purchases stand a high chance of distorting these markets,” said Shinichi Fukuda, a professor of economics at Tokyo University. “Prices would have an upward bias, so even if the BOJ bought at market rates, this would be considered close to helicopter money.”
Other options include creating a special account at the BOJ that the government can always borrow from, committing to hold a certain percentage of outstanding government debt or buying corporate bonds, economists say.
With the BOJ’s annual Japanese government bond purchases already more than twice the volume of new debt issued by the government, Japan has already adopted something akin to helicopter money, said Etsuro Honda, a former special adviser to the Cabinet and a key architect of Abe’s reflationary economic policy.
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