Helicopter Money Speculation Just Won't Go Away

  • Revisions lower bar for central bank to fund deficit: Mizuho
  • Government received ‘carte blanche’ to issue new bonds: Nordea

Haruhiko Kuroda.

Photographer: Akio Kon/Bloomberg

No matter what he says or does, helicopter money speculation follows Japan’s central bank chief Haruhiko Kuroda.

From Tokyo to Stockholm, some analysts see the groundwork for a central bank-funded fiscal stimulus in last month’s decision by the BOJ to target sovereign bond yield levels. The shift means the monetary authority would be obligated to absorb new government debt sales to stop borrowing costs rising, according to Mizuho Securities Co. and Nordea Markets. The risks for investors, they say, include a rapid depreciation of the yen.

“The change in policy has lowered the hurdle to helicopter money by one rung,” said Noriatsu Tanji, a senior bond strategist at Mizuho Securities in Tokyo. “So basically, it’s now up to what the government does on the fiscal side.”

Kuroda has repeatedly ruled out helicopter money as an option even though consumer prices are falling as quickly now as when he launched his easing program three and a half years ago. Investors have so far struggled over what the latest policy revisions ultimately mean, with both bond yields and the yen swinging between extremes in the weeks since the Sept. 21 announcement.

Japan’s cabinet in August approved a second supplementary budget that included part of an economic stimulus package. An influential economic adviser to Prime Minister Shinzo Abe, Etsuro Honda, is pushing for a third supplementary budget and closer coordination between monetary and fiscal policy.

“What I wanted to say the most was about managing fiscal and monetary policies in a unified manner,” Honda said in an interview Thursday, referring to discussions with Abe the previous week. “Japan should not be afraid of increasing bond issuance.”

Former U.S. Treasury Secretary Lawrence Summers, speaking at a BOJ conference in Tokyo at the end of last month, said that in general a successful yield-curve targeting strategy “operates in a positive way with respect to the government’s budget constraint, and therefore should enable more expansionary fiscal policies.”

For details of the legal hurdles to helicopter money in Japan, click here.

“The BOJ has become more and more creative with monetary policy, but the more creative they’ve been, the more it’s allowed a weakening of fiscal discipline,” said Hiroshi Shiraishi, a Tokyo-based senior economist at BNP Paribas SA. “Whether it leads to monetization is up to the government, not the central bank.”

Japan’s central bank still has room to increase monetary stimulus and doesn’t intend to reduce its bond-buying program soon, Kuroda said in an interview.

“For the time being, we keep the long-term interest rate around zero. If necessary, we could reduce the target rate of the 10-year Japanese government bond even lower than zero percent,” Kuroda said on Saturday, speaking with Bloomberg Television’s Francine Lacqua. “If necessary, we can reduce both the short end and long end of interest rates.”

The yield on the benchmark 10-year Japanese government bond initially surged above zero for the first time since March after the BOJ announced the plan to pin it around zero percent. It then pushed to a one-month low of minus 0.09 percent, and was at minus 0.05 percent Tuesday in Tokyo. Japanese markets were closed Monday for a holiday.

Japan’s currency initially strengthened back to near 100 per dollar after the BOJ announced the change to stimulus, but has since retreated to around 103.90.

Taper Talk

Some analysts including Sumitomo Mitsui Banking Corp. and JPMorgan Asset Management see the shift to yield targeting from expanding the money supply as effectively a tapering of quantitative easing.

Nordea Markets analyst Martin Enlund suggests that’s a misinterpretation, because targeting yields means giving up control of the monetary base, and would actually result in a faster pace of bond purchases if yields were to spike. Because of the risk that that would boost the supply of the local currency and lower its value, he says he remains a strategic yen bear.

“The Japanese government has now been given a carte blanche from the Bank of Japan: issue as much JGBs as to your heart’s content,” Stockholm-based Enlund wrote in a client note last week. “If it looks like a helicopter, flies like a helicopter, and sounds like a helicopter...”

BT Investment Management -- which manages the equivalent of about $13.6 billion -- agrees, saying the BOJ’s “masterfully constructed” policy framework makes helicopter money “highly likely.”

“This would be a game-changer in regards to rescuing the global economy, because other countries will follow if it proves to be successful in Japan,” Vimal Gor, the firm’s Sydney-based head of income and fixed interest, wrote in a newsletter to clients. “We expect the Japanese government to step up very soon.”

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