This weekend saw a stark change-of-pace in price action trends around Japanese markets. After Shinzo Abe’s coalition won a super-majority in the upper-hours of Japanese parliament, resistance has been lessened for the push for constitutional reforms and additional economic stimulus. This provided a significant move of weakness in the Yen as the prospect of even more intervention became a much more likely prospect for the island nation.
Already, markets are beginning to circle the date of the next Bank of Japan meeting on July 28th and 29th for a potential announcement of additional stimulus; and after Shinzo Abe and Haruhiko Kuroda met with Ben Bernanke earlier this week, the rumor that Japan may be nearing the deployment of ‘helicopter money’ began to gain traction, furthering trends of Yen weakness and Nikkei strength.
The term ‘helicopter money’ was coined by Economist Milton Friedman in his 1969 paper entitled ‘The Optimum Quantity of Money,’ and has never been actually employed. This is still very theoretical in nature, and can refer to one of two actions thought to be an alternative to Quantitative Easing. In one mannerism, policy can be set for the permanent monetization of a government’s budget deficits. In the other, policy can be set to make direct transfers to the private sector financed with base money; similar to cash being freely dropped from a helicopter so that it can then recirculate into the financial system, thereby bringing up inflationary pressure. This is thought of as being ‘QE for the people,’ rather than QE being driven into the banking sector, which as of yet hasn’t provided much in the realm of tangible results for the Japanese economy.
To accomplish such a push, markets would need coordination of monetary and fiscal policy and with the Abe coalition’s recent win in Japanese elections, the prospect of this taking place may have just become more likely. However, there are some impediments to this happening anytime soon, particularly at the next BoJ meeting at the end of this month; namely, the fact this is currently not legal in Japan. As of now, it is currently prohibited by law for Japan to directly underwrite government debt; so we’d need to see parliament modify this law before helicopter money is deployed.