For all the talk of cash being dropped from the sky, what the Bank of Japan does next is anyone’s guess, even if some investors seem to think otherwise.
Much to Bank of Japan Gov. Haruhiko Kuroda’s relief, the Japanese yen weakened 5% over the past week, one of the biggest such moves in almost two decades. Prime Minister Shinzo Abe’s party won upper house elections convincingly, giving backing for fresh fiscal stimulus. But also at play, former Federal Reserve Chief Ben Bernanke was in Tokyo to visit officials, fueling the notion that Japan is considering even more extreme monetary policies like helicopter money.
There are reasons for the BOJ to get creative. Japan’s current monetary policy seems to have run its course. In its current form, the BOJ’s asset purchase program will likely hit a limit of how many Japanese government bonds it can buy in the next two years.
The negative interest rate experiment seems to have had unexpected effects, prompting BOJ fine-tuning. Japan’s financial institutions have struggled to adapt. A step deeper into negative rates might only complicate things more. Purchasing additional securities like ETFs can only be incremental with diminishing returns. Corporate bonds are too small a market.
Add to this an increasingly out-of-reach inflation target of 2%, and Mr. Kuroda needs bigger and bolder moves. In an interview with The Wall Street Journal in April, Mr. Kuroda flatly denied fiscal expansion funded by monetary policies, but did say policies between the central bank and the government could be cooperative. Prime Minister Abe is readying his next shot of fiscal stimulus.
Putting these signals together, investors could imagine policies that tiptoe toward helicopter money, while creating a fig leaf of cover to say it isn’t direct monetization. This would seem to preclude direct funding to consumers and the government.
A more talked about alternative would be direct collateral and interest-free loans to banks that then lend out further. Also possible would be a restructuring of some government debt that the BOJ already owns by converting existing bonds into perpetual bonds, essentially spinning it into debt the government never has to pay off.
The Bank of Japan would hold these perpetual bonds on its balance sheet and not sell, while the government would likely not redeem. The central bank has arguably been heading this way anyway, since it buys nearly anything and everything the government issues.
Crossing the Rubicon into helicopter money could backfire if the market isn’t ready. Like Mr. Kuroda’s surprise jump into negative rates in January, there has been little intellectual leg work aired publicly to justify such moves. There’s equally the risk for everyone who has sold yen in the past week that Mr. Kuroda decides the July 28 meeting isn’t yet the time for such experimentation.
Like pushing below the theoretical zero-bound on interest rates and the BOJs tiered system for negative rates, Mr. Kuroda isn’t shy of getting creative. It’s just hard to tell when those creative juices are ready to flow.
Write to Anjani Trivedi at firstname.lastname@example.org