Economy

Helicopter Money Discussion Gains Momentum as Bank of Japan Approaches Limit

By Stanley White

TOKYO – The Bank of Japan’s upcoming review of its monetary stimulus program, scheduled for September, has reignited speculation regarding the potential adoption of “helicopter money”—the idea of directly printing money for government expenditure to stimulate inflation.

On Friday, the BOJ fell short of market expectations by not increasing its substantial purchases of government debt or further lowering already negative interest rates. This has reinforced the perception that its options within the current policy framework to increase prices and combat two decades of deflation are becoming limited.

After three years of significant monetary easing yielding little progress, economists suggest that the BOJ’s governor, Haruhiko Kuroda, may lean towards closer collaboration with Prime Minister Shinzo Abe. Abe recently unveiled a fiscal spending package exceeding 28 trillion yen (approximately $275 billion) in an effort to spur growth.

“The comprehensive review may signal the beginning of greater cooperation with the government, potentially alluding to helicopter money,” noted Daiju Aoki, an economist with UBS Securities. “The government could issue 50-year bonds, and if the BOJ commits to holding them for an extended period, it would resemble helicopter money.”

The term “helicopter money,” originating from economist Milton Friedman in 1969 and highlighted by former Federal Reserve Chair Ben Bernanke in 2002, describes a strategy for combating deflation through aggressive money printing. However, some economists express concerns that such measures could lead to hyperinflation and severe currency devaluation.

Speculation surrounding Japan’s potential move towards helicopter money intensified earlier this year when Bernanke met with Abe and Kuroda in Tokyo, although officials swiftly attempted to calm those discussions.

In its strictest interpretation, a government could execute a helicopter drop of cash by selling perpetual bonds—those which do not require repayment—directly to the central bank. While this scenario seems unlikely in Japan, many believe the BOJ may gradually expand its asset purchases, potentially incorporating municipal bonds or debt from state-backed entities. This could enhance its influence beyond its current annual purchases of 80 trillion yen in Japanese government bonds from financial institutions.

“As these assets have lower trading volumes and liquidity compared to government debt, BOJ involvement could lead to significant market distortions,” explained Shinichi Fukuda, an economics professor at Tokyo University. “This could create upward price pressures, and BOJ purchases at market rates would closely resemble helicopter money.”

Alternative approaches under consideration include establishing a special BOJ account for government borrowing, committing to hold a certain percentage of prevailing government debt, or purchasing corporate bonds.

As the BOJ’s annual purchases of government bonds outpace new debt issuance, Etsuro Honda, a former special adviser to the Cabinet, suggests that Japan is already practicing a form of helicopter money. Despite these measures, consumer prices fell in June at their steepest rate since the BOJ initiated quantitative easing in 2013.

Leading up to its July 29 meeting, sources indicated the BOJ was likely to maintain its stance, with no major updates expected on its consumer price forecasts. However, Abe’s unexpectedly substantial spending package, announced just days prior, lacked specific details on funding. Key cabinet ministers quickly began urging the BOJ to align its policies with the government’s plan.

Ultimately, the BOJ’s response was seen as minimal, opting to increase its purchase of exchange-traded funds to 6 trillion yen while maintaining its current interest rate at -0.1%, resisting calls for additional bond purchases.

The real impact of this pressure may become evident in the September review, once the BOJ has had time to formulate a more comprehensive strategy in tandem with Abe’s fiscal initiatives.

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