BoJ Ready for Helicopter Money?

Helicopter money, that’s the big talk in the past week. The term helicopter money refers to a case where the government hands out money to citizens and funds it through printed money. The last time helicopter money was relevant was back in 2009. That’s when Ben Bernanke, then Federal Reserve Chairman, literally opened up the printing press and poured massive amounts of liquidity into the bond market, in tandem with a massive fiscal stimulus plan from the US government. Now, investors are speculating that the BoJ is ready to unleash a similar move, in coordination with the Abe government. And with the BoJ monetary policy meeting scheduled for this Friday, investors have high hopes. Are these hopes in place?

Kuroda Vs. Abe

In the past several months, BoJ watchers have been routinely underwhelmed by the BoJ’s statements. The BoJ slashed deposit rates to -0.5% and increased its QE program to a whopping ¥80 Trillion. But since those two announcements deflation has returned, yields on Japanese Government Bonds plunged to record lows and Japan’s GDP growth marked a modest 0.1% annually. And still, no monetary bazookas have been announced. The BoJ Governor, Haruhiko Kuroda, seems reluctant to add more firepower. But during the past few meetings, there is one mantra that Mr. Kuroda has kept repeating—that monetary stimulus should come in tandem with fiscal stimulus. Kuroda wants the Japanese government, under Shinzo Abe’s leadership, to lean in with more fiscal stimulus in order to "help revive the Japanese economy.”

Kuroda’s message is clear: So long as the Japanese government does not embark on fiscal stimulus, the BoJ will refrain from further action.

And this brings us to this week, Shinzo Abe the Japanese Prime Minister, announced the intent of the Japanese government to deploy trillions of Yen in fiscal stimulus. Since Mr. Abe made this announcement, no binding decision has been made. The stimulus is likely to be approved only in September. The BoJ Governor might decide to take a wait-and-see approach. After all, Abe’s government had promised overwhelming fiscal action before but its actions fell short. If Kuroda decides to take action and the government fails to pass a significant stimulus package, then Kuroda might be accused of jumping the gun.

Some point to Kuroda’s record as BoJ Governor and, specifically, his tendency to surprise. It’s true; Kuroda is known for his fondness for a surprise action (or inaction as the case may be), but so far, those surprises failed to deliver long-term results, and Kuroda knows that quite well. Hence, the greater likelihood is that Kuroda will wait for Abe’s government to announce fiscal stimulus plans before following suit with another round of monetary stimulus.

What if the BoJ Acts?

If the BoJ decides to forgo the actual approval of government stimulus and unleash more easing it will be a very clear sign—a sign that the BoJ and the Japanese government have reached some sort of understanding, i.e. a return of a coordinated policy between the two. Fiscal stimulus will be likely to follow, and the Yen will resume its long-term bearish trend against the Dollar.

What if the BoJ does not Act?

The more likely scenario, of course, is that Kuroda decides to sit on the fence and not act. The focus will move into Kuroda’s rhetoric. If Kuroda signals a willingness to unleash more easing, with the condition of fiscal stimulus first, the Yen might still turn softer against the Dollar. However, the move is likely to be more modest in the immediate term, and investors’ attention will likely shift back to the US economy and the Fed. Nevertheless, other “softer” currencies, such as the Euro or the AUD, could lose ground because, after all, fiscal stimulus hinges on Japanese politics which is not always straightforward.

Look for my post next week.

Best,
Lior Alkalay
INO.com Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.