Japanese Prime Minister Shinzo Abe's economic strategy relies on a weak yen to fuel exports, boost profits and end deflation, but the currency hasn't been cooperating.
Not even sub-zero interest rates have helped weaken the yen. The Bank of Japan (BoJ) in January imposed a negative rate of minus 0.1 percent on some reserves, and the yen is still up 18 percent against the dollar since the start of the year.
Even though Japan's unemployment rate of 3 percent is the lowest in over two decades, pessimistic employers aren't handing out significant raises, according to Daiwa Capital Markets economists Emily Nicol and Chris Scicluna. The Japanese economy “continues to do little more than move sideways,” they wrote in a report published Sept. 2.
That's putting pressure on Haruhiko Kuroda, the governor of the Bank of Japan, to move beyond his existing program of negative interest rates and quantitative easing. Thanks to 80 trillion yen ($786 billion) a year in purchases of state debt, the BoJ owns 38 percent of Japanese government bonds—compared to the Federal Reserve's 14 percent ownership of U.S. debt—and is on track to own half by end of next year, according to Japan Macro Advisors. All that spending is getting a diminished return, said Tom Murphy, managing partner of Family Office Research and Management in Sydney. Kuroda's quantitative easing “is losing its firepower,” he said.
As Kuroda runs out of alternatives, he might need to reach for one of the most extreme tools a central banker has: helicopter money, so-called for the image of bankers hovering above consumers and tossing down free cash in the desperate hope that people will spend it. Another way to implement helicopter money is for the central bank to give carte blanche to the government to borrow as much as it wants and not worry about paying the money back.
Japan employed a version of helicopter money in the early 1930s, when the BoJ helped reflate the economy during the Great Depression by directly financing deficit spending. Today, the central bank could do something similar, agreeing to buy government bonds that need never be repaid. “The only thing left at the table, as far as Japan is concerned, is probably helicopter money,” David Woo, head of global rates and currencies research for Bank of America Merrill Lynch, said in Bloomberg Television interview last month.
Kuroda has tried to stamp out speculation about helicopter money, saying several times this year that the BoJ isn't legally permitted to underwrite perpetual government bonds and monetize fiscal deficits.
But the central banker has changed course before. Late last year, he ruled out a negative interest rate policy—and then adopted the strategy in January. Legal concerns notwithstanding, some type of helicopter money might not be far off, since Kuroda could commit to buying and holding Japanese government bonds without explicitly saying the funding was permanent. Such “pseudo-helicopter money” is a possibility, Daiju Aoki, an economist with UBS in Tokyo, told Bloomberg News.
For now, Kuroda is probably going to give the BoJ's negative interest-rates policy more time, with bond investors closely watching the central bank's policy review decision today. However, unless they're willing to adopt direct financing of government spending, Kuroda and his team won't be able to accomplish much, according to Marcel Thieliant, Japan economist with Capital Economics in Singapore. “They are near the limits of what they can do,” he said.
A team of HSBC economists led by Frederic Neumann agree. “Short of more radical options like helicopter money and foreign bond purchases, which both seem unlikely for now due to legal and political reasons, officials have few options left to ease policy meaningfully,” they wrote in a report published Sept. 9.
Fighting that sense of futility is one of Kuroda's many challenges. Speaking in Tokyo on Sept. 5, he dismissed suggestions that the BoJ is out of ammunition. “There is ample room for further monetary easing in either of three dimensions—quantity, quality and the interest rate,” he said. “And other new ideas,” he added, “should not be off the table.”