Japan’s Helicopter-Money Ban Is Anchored in Occupation-Era Law

  • Bernanke visit has revived debate on the contentious topic
  • Kuroda cites law preventing BOJ direct financing of spending

Bank of Japan Governor Haruhiko Kuroda’s repeated rejections in recent months of "helicopter money" as illegal are rooted in a provision dating from 1947, during the U.S.-led postwar occupation of the country.

While the near 70-year history of the Public Finance Law and its affirmation in the 1997 Bank of Japan Act haven’t damped speculation that this strategy is an option for policy makers today, there would be hurdles to overcome, both historical and legal.

During the 1930s, the government had the bank purchase debt directly to pay for stimulus and the costs of the war in China. The public finance law that bans this was born amid a massive overhaul of the political, economic and legal systems that had led Japan to war and economic ruin. 

The law specifically prohibits the government from making the BOJ buy sovereign bonds or lend money to the state. A caveat allows for this to happen in special circumstances (without describing what these might be), and only up to an amount that must be approved by parliament.

The central bank and government use the exception to directly sell debt to the BOJ to replace some bonds it holds that have matured. Under the "BOJ rollover" plan, the bank plans to buy 8 trillion yen ($76 billion) of bonds this fiscal year, according to the Ministry of Finance.

‘Turbulent History’

As for adopting helicopter money, as direct financing of fiscal spending has been dubbed, Kuroda has repeatedly said this is off the table. He’s said the "long, somewhat turbulent history of central banking and public finance" in developed economies and Japan’s institutional environment point to "no need and no possibility for helicopter money."

The BOJ’s website also offers a Q&A that cautions against directly buying government debt, noting that once a central bank provides money this way, a nation risks losing fiscal restraint and may find it hard to slow down the printing presses.

Still, the caveat in the law, Japan’s pressing need to get its economy on track and past experience with Kuroda changing tack has kept the speculation alive. The governor caught many off guard in January when he adopted a negative interest rate policy about a week after rejecting the notion.

‘Time and Persuasion’

“The bar for changing the law is very, very high,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “It would take a lot of time and persuasion. I don’t think Japan’s economy is that bad yet.”

Former Federal Reserve chief Ben S. Bernanke, who met Japanese leaders in Tokyo this month, floated the idea of perpetual bonds during discussions in Washington with one of Abe’s key advisers in April. Bernanke’s visit and his previous remarks on helicopter money reignited the debate in Japan.

Prime Minister Shinzo Abe’s government has a majority in both houses of parliament, giving him power to change the law. Yet that might not actually be needed, Ogata said -- considering that the BOJ’s current asset-purchase program in the secondary market has the central bank "doing something similar to underwriting" the government’s debt.

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