Photographer: Kiyoshi Ota/Bloomberg

Helicopter Cash Clues Lie in Life and Death of Japanese Viscount

  • Takahashi rescued Japan from Depression, Bernanke says
  • Inflation surged after viscount’s assassination in 1936

As Bank of Japan Governor Haruhiko Kuroda confronts pressures to launch helicopter money, he could do a lot worse than remember the life -- and death -- of Viscount Korekiyo Takahashi.

QuickTake Helicopter Money

As Japan’s economic czar in the early 1930s, Takahashi initiated the equivalent of helicopter money, using the BOJ to directly finance deficit spending by the government. Coupled with abandonment of the gold standard, Takahashi’s reflationary policies “brilliantly rescued Japan from the Great Depression,” Ben S. Bernanke said in 2003. A steep yen decline helped.

Takahashi Korekiyo, center.
Takahashi Korekiyo, center.
Photographer: Bettmann Archive via Getty Images

Unfortunately, the tale doesn’t end there. After Takahashi subsequently sought to rein in deficits by slashing military spending, he was assassinated in 1936 by rebelling army officers. A breakdown in fiscal discipline and an inflationary surge followed as Japan geared up for World War II.

So what lessons should be drawn today as Kuroda seeks to stave off a deflationary downturn?

As former Federal Reserve Chairman Bernanke noted, Takahashi’s money-financed fiscal program worked. Yet turning off the budgetary spigot afterward proved impossible -- with adverse consequences for the nation’s finances and economy.

QuickTake: Helicopter Money

First conceived by economist Milton Friedman in 1969, the term helicopter money has become shorthand for a fusion of fiscal and monetary policy. Rather than issuing debt, a national government draws newly printed money from the central bank. It then injects that cash straight into the economy with tax cuts or spending programs. The exact contours of how that would work aren’t well-defined.

Japan is at the forefront of the chopper cash debate because it’s closest to the limit of what monetary policy can do for the economy on its own. The BOJ’s balance sheet totals more than 80 percent of gross domestic product.

Other central banks are not ruling out adopting such a radical strategy should the situation turn dire enough.

European Central Bank chief economist Peter Praet said in March that handing out money was an “extreme” step that theoretically “all central banks can do.” The ECB has pushed euro-area monetary easing further than ever and policy makers will meet this week to discuss whether their current stimulus -- including negative interest rates and 1.7 trillion-euro ($1.9 trillion) asset-purchase plan -- is enough to meet their inflation goal.

Fed Chair Janet Yellen told reporters on June 15 that close coordination of fiscal and monetary policies is “something that one might legitimately consider” in extremity.

On its face, helicopter money sounds like something economists have long insisted doesn’t exist: a free lunch. The government gets money from the central bank that it doesn’t have to pay interest on and doesn’t have to pay back and then gives it away to its citizens.

Remember Zimbabwe

The trouble is that it’s potentially a path to perdition as its repeated usage ultimately spawns hyper-inflation. (See the U.S. Confederacy during the 1861-1865 Civil War or Zimbabwe in the last decade.)

That’s why many central banks, including the BOJ, have strictures against it, although a Japanese inflationary surge seems remote for now. The BOJ by law is prohibited from buying government bonds directly from the finance ministry. Instead, it purchases them from intermediaries such as banks.

“Unless the existing legal framework changes, helicopter money isn’t possible," Kuroda told Japanese lawmakers on April 19.

The Bank for International Settlements warned in a paper published on Monday that the policy “obviously” undermines central-bank independence and so risks losing the public’s confidence in monetary institutions.

The chatter about helicopter money is “largely a scam,” said former International Monetary Fund chief economist Olivier Blanchard. What’s important is increasing fiscal stimulus.

Whether that’s financed by issuing bonds at roughly zero interest rates or by drawing money from the central bank “doesn’t make a whole lot of difference,” Blanchard, a senior fellow at the Peterson Institute for International Economics, said in a July 14 Bloomberg Television interview.

Little Incentive

Japan is already engaged in a strategy that involves helicopter money, Etsuro Honda, an adviser to Prime Minister Shinzo Abe, said in an interview this month.

Because of the negative yields on Japanese government debt, banks have little incentive to buy them unless they expect to sell them later to the central bank under its asset buying program, said Kohei Iwahara, director of economic research at Natixis in Tokyo.

“It can be argued that the central bank is doing helicopter money in reality,” he said.

Proponents assert that there are advantages to purer forms of such cash injections. For one thing, the government doesn’t have to pay the money back, as it would have to if it borrowed in the bond market.

Then there’s something called Ricardian Equivalence, named after 19th century economist David Ricardo. It posits that debt-financed government spending doesn’t lift an economy because citizens know it will have to be paid for with future tax increases. So they save more now to prepare for that, depressing demand.

In the case of helicopter money, such a consideration would be moot. “Unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens,” Bernanke wrote in an April posting on his Brookings Institution blog.

Other pros of helicopter money include:

  • Lifting too-low inflation expectations. “If they were to do this, then it may act as a jolt to expectations,” said Leon Berkelmans, a director at the Lowy Institute for International Policy in Sydney
  • Providing more kick by boosting the velocity at which cash circulates throughout the economy, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. While buying bonds from banks injects money into the financial system, the cash has had limited economic impact because cautious consumers and companies have held rather than spent it
  • Spreading the money around more equitably than quantitative easing, which has raised prices of bonds and other assets predominantly held by the wealthy. “It would be more broadly distributed,” said Peterson Institute senior fellow Joseph Gagnon
  • Limiting market distortions like those caused by QE, which has helped pushed yields on many bonds below zero

Perli said he expects Japan to adopt “something with the flavor” of helicopter money in coming months. In its simplest form, that might involve a fiscal stimulus accompanied by an equal amount of bond purchases by the BOJ, he said.

While that wouldn’t qualify as pristine helicopter money, the market would likely see it as “de-facto,” chopper cash, Perli said in an e-mail.

“It’s time to think the unthinkable as monetary policy is pushed further to the extreme,” said David Mann, chief Asia economist at Standard Chartered Plc. “We might actually see policies that economics students only ever talked about in an imaginary or long ago world (i.e. the 1930s) become real.”

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