Speculations of Helicopter Drops in Japan Clawing Back

by Darwin on September 11, 2016

I just had a close friend ask me, “What is helicopter money? I’ve been hearing it in the news lately.” Now, rather than explaining it to just one person, I had to write about this topic since many may have questions about the intricacies of this financial tool. Speculations of helicopter money, or helicopter drops, have increased over the past few months in some economies, such as Japan and Europe.


Helicopter Drops Explained


Now, when some hear the term “helicopter money”, they may wonder whether a helicopter drops money to the public. Although that is not the exact definition, it is a pretty good analogy. Central banks have used all the tools in the toolbox to try to increase inflation and spur economic growth. However, as we’ve seen in Japan and Europe, these tools have proved to be ineffective.


From negative interest rates to quantitative easing, these tools have failed to increase inflation and increase economic growth in Japan and Europe. Some economists are now arguing for the implementation of helicopter drops in these slowing economies.


Now, we’ll get into the theoretical definition of this unorthodox monetary policy tool. A helicopter drop is a theoretical tool that involves the creation of money and distributing it to the general public in an economy. In theory, this should stimulate the economy through increased consumer spending, and in turn, increasing inflation. Nobel laureate Milton Friedman mentioned the term in his 1969 essay, entitled “The Optimum Quantity of Money.” Although the monetary policy seemed crazy at the time, it’s looking less crazy for some economies.


Helicopter Money Implementation


Central banks could implement helicopter money through various avenues, such as tax rebates and bond purchases. A central bank could issue a one-time tax rebate and distribute money to the general public. On the other hand, the government could issue new “risk-less” government bonds, and thereafter, the central bank would purchase and hold the bonds. However, the interest on the government bonds would be returned to the government, which would then be distributed to the general public.


Helicopter Money is Still Possible in Japan


Speculations of helicopter money heightened when former U.S. Federal Reserve Chairman Ben Bernanke, also known as “Helicopter Ben” to some. However, Bank of Japan Govern Kuroda crushed the optimism of the potential implementation of helicopter drops.


Although the speculations of helicopter money came to a brief halt after Bank of Japan Governor Haruhiko Kuroda denied that he would implement the tool, speculations have began to start flying higher. Consequently, we may see the first “real” implementation of this theoretical monetary policy tool.


Japan suffered from five consecutive months of Consumer Price Index (CPI) drops in 2016. Japan reported a CPI of -0.10% for March. Thereafter, it reported a CPI of -0.30% for April. For the months of May, June and July, Japan had a CPI of -0.40%. Moreover, Japan’s gross domestic product (GDP) has fallen for four consecutive years, arguing for different monetary policy tools.


Japan has been implementing aggressive quantitative easing and extended its stimulus program in late July 2016. The Bank of Japan doubled its purchases of exchange-traded funds (ETFs) due to increasing pressure from the Japanese government and financial markets for bolder actions to spur economic growth. The Bank of Japan increased its ETF purchases to an annual 6 trillion yen, or $58 billion, from 3.3 trillion yen. Moreover, it maintained its bond purchase program at a rate of 80 trillion yen. Additionally, it left its interest rate that it charges financial institutions at -0.10%.


However, the untraditional uses of negative interest rates, coupled with Japan’s aggressive ETF and bond purchases have been ineffective. Therefore, Japan’s current monetary policy may be unsustainable. This has caused some Japan-based economists to argue that the Bank of Japan shouldn’t rule out helicopter drops.


Helicopter money faces legal roadblocks in Japan. However, Prime Minister Shinzo Abe could change the law for it to be legal to implement helicopter money.


What to Watch Out For


The Bank of Japan will be meeting on September 20-21, 2016. Consequently, investors should watch the prices Japanese yen because any signs of the potential of helicopter money will affect it or whether the Bank of Japan will continue to its current monetary policy. Some currency pairs that investors may want to keep an eye out on are USD/JPY, EUR/JPY, GBP/JPY and CHF/JPY. Over the past few months, the Japanese yen has fallen on any talks of the potential of helicopter money. Japan’s approval of its $274 billion stimulus package in late July caused the Japanese yen to hit a three-week high against the U.S. dollar. Consequently, Stern Binary Options Analyst Anthony Di Maggio indicated that currency traders should be on the edge of their seats at the Bank of Japan’s September meeting and be ready for anything.


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