Tokyo: Japanese policymakers, who won’t go as far as funding government spending through direct debt monetisation, might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, say people 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 programmes 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 28-29 July, analysts say.
Government and central bank officials say there is no chance Japan will resort to having the central bank monetise 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.
Officials 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% inflation goal.
“It’s true good coordination of monetary and fiscal policy is very important for Abenomics," another official 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 monetising debt, which could weaken its credibility. After the July meeting, the BOJ next reviews policy 20-21 September.
Meeting market expectations
Abe’s administration is preparing a stimulus package of public works projects, payouts to households and cheap loans for infrastructure projects.
Lawmakers are calling for a package of about 10 trillion yen ($94 billion) partly financed by new bond issuance, making full use of the BOJ’s money printing that pushed 10-year yields into negative territory.
The BOJ is now buying roughly 110-120 trillion yen of bonds a year to meet a pledge to expand the balance of its holdings at an annual pace of 80 trillion yen.
While the BOJ says it does not buy bonds in order to finance public debt, some analysts think that acting this month may have a positive effect on markets by showing the central bank and government are coordinating policies.
“Japanese policymakers could meet market expectations for helicopter money by compiling a supplementary budget in autumn and accompanying that with additional monetary easing," said Mari Iwashita, chief market economist at SMBC Friend Securities.
Koichi Hamada, a close Abe aide, said that while he opposes institutionalising helicopter money, expanding fiscal and monetary stimulus simultaneously as a “one-off" boost could work in stimulating the economy.
“For advocates of helicopter money, it’s not impossible to regard that as one variation of helicopter money," he told Reuters on Thursday. Reuters