Japan may be on route for a "soft" form of helicopter money

Fri Jul 15, 2016 6:48am EDT
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By Leika Kihara

TOKYO (Reuters) - Japanese policymakers, who won't go as far as funding government spending through direct debt monetization, might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, say sources familiar with the matter.

In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what's called "helicopter money", where a central bank directly finances budget stimulus through programs such as perpetual bonds.

With Prime Minister Shinzo Abe preparing a big spending package to be announced as early as this month, the Bank of Japan will remain under pressure to expand monetary stimulus at its rate review on July 28-29, analysts say.

Government and central bank officials say there is no chance Japan will resort to having the central bank monetize debt to fund government spending, such as by buying perpetual bonds to allow the government to boost spending without paying back debt.

"It's clear the government won't do helicopter money in the strict sense," said a government official with knowledge of deliberations on what action to pursue.

"But it's a different story when you're talking about combining fiscal and monetary expansion. That's possible," said the official, who insisted on anonymity.

Speculation that Japan was considering helicopter money ignited this week after former Federal Reserve Chairman Ben Bernanke met Abe and BOJ Governor Haruhiko Kuroda during a private visit to Tokyo.

Helicopter money was coined by American economist Milton Friedman and gained market prominence when Bernanke cited it in a 2002 speech as a way central banks might finance government budgets directly to fight deflation.   Continued...

Japan's Prime Minister Shinzo Abe poses for photos before a news conference following a victory in he upper house elections by his ruling coalition at the LDP headquarters in Tokyo, Japan, July 11, 2016. REUTERS/Toru Hanai