Is Japan on the cusp of ‘helicopter money’? - Rabobank

Michael Every, Head of Financial Markets Reseach, Asia-Pacific, at Rabobank, notes that the market now suspects we are on the cusp of ‘helicopter money’ in the near future following the meeting Ben Bernanke had with BoJ Governor Kuroda, which appears to have had a powerful effect in the market.

Key Quotes

Whatever Ben Bernanke said at lunch with BoJ Governor Kuroda it had a powerful effect. Indeed, for financial markets ‘When Bernanke Met Kuroda-y’ engendered a similarly orgasmic reaction as that infamous movie diner scene in the original movie. USD/JPY rose all the way from 100.40 to an intraday peak of 102.90 before consolidating slightly, while including this morning’s open the Nikkei has now surged 6.3%  - and yet underlining the scale of Japan’s problems, it is still down 15.5% YTD in local currency terms. At the same time, JGB yields edged up only marginally, with the 10-year staying at -0.26% at time of writing. Will other countries soon be saying “I’ll have what he’s having?”

The celebration is because in the same way the BoJ repeatedly said it would not increase stimulus, then did so, and repeatedly said it would not cut interest rates to negative, then did so, the market now suspects we are on the cusp of ‘helicopter money’ in the near future: if so, that’s obviously negative for JPY and hence positive for equities. (Though as it is also positive for USD it’s negative for CNY and commodities, so deflation for those who don’t “have what he’s having”.) 

Of course, no-one is calling it helicopter money at this stage. Instead it’s ‘just’ another fiscal stimulus package of USD98bn, or around 2% of GDP. However, given the fiscal deficit is already around 8% of GDP and public debt around 240% of GDP, this shows PM Abe’s attempt to use austerity to help the economy recover have failed abysmally; the path ahead is instead likely to be fiscal stimulus backed by the BoJ, and if that isn’t helicopter money then I’m not sure what is. 

There’s a key lesson there for other economies too. Japan has long been at the vanguard of our new normal of too-much-debt-and-too-little-structural-reform. It’s tried to export its way out for decades - and failed. It’s tried ultra-low rates: they failed. It’s tried one-off fiscal stimulus packages: they failed. It’s tried more QE than anyone else: it failed. It’s tried deliberate currency debasement: it failed. It’s tried austerity: it failed. But it hasn’t tried continuous fiscal stimulus backed by the central bank until CPI hits 2% y-o-y sustainably. In effect, if you are playing ‘chicken’ with the markets and deflation, the only way to win is to rip out your steering wheel. 

Yet is helicopter money a permanent cure for Japan’s (or our global) ills? If only!! In time it too could easily produce incredibly damaging and corrosive effects. (**cough** Weimar **cough**) Otherwise we’d literally be saying there is such a thing as a free lunch every day. Indeed, as I addressed in the recent Thin Ice specials, such radical policy is as likely to place severe pressures on our global status quo as the deflation into which we are drifting: how can ‘free’ money not change things!  Yet with one headline today being ‘IMF warns Italy of two-decade long recession’ is the current status quo sustainable? As Isaiah 22:13 says, 'Let us eat and drink; for tomorrow we shall die.’