Japan: Outlook for expectations of helicopter money – Nomura

Research Team at Nomura, suggests that the value of the yen fell dramatically last week versus the US dollar and in addition to overseas developments, the possibility of the adoption of helicopter money in Japan has also been attracting attention.

Key Quotes 

“The visit to Japan by former US Fed Chairman Ben Bernanke amid growing expectations of fiscal expansion and monetary easing is likely to have led to speculation that Japan might perhaps lean towards the idea of helicopter money. The BOJ will hold its next monetary policy meeting on 28-29 July. Meanwhile, the government is scheduled to finalize its economic stimulus package within the month. Policy events in Japan thus look likely to be concentrated towards end-July. In our view, if something were to boost expectations of helicopter money in financial markets, it would probably be the policy set of “increased JGB purchases and a larger-than-expected stimulus package.”

However, we do not expect the government to implement this combination of policies in July. The BOJ is highly likely to loosen its monetary policy further, but we expect it to maintain its JGB purchases at their current levels. Meanwhile, we think any economic stimulus package is unlikely be so large as to generate a major surprise effect. If our forecasts are correct, expectations of helicopter money are likely to subside for a while.

Economic policy update

The Nikkei reported on 12 July 2016 that the government's economic stimulus package might total more than ¥10trn. We expect it to be around ¥10trn, and think it is unlikely to be considerably more than this.

The stimulus package might include the following: measures aimed at stimulating consumer spending such as premium shopping vouchers and handouts, increases in staff and facilities for childcare and long-term care, the use of FILP funds to build the maglev Chuo Shinkansen and construct ports and facilities aimed at encouraging exports, and traditional infrastructure projects.

The Japanese Diet would likely discuss the proposal for the supplementary budget, which will provide the funding for the economic stimulus package, during the extraordinary session expected to be held from mid-September onwards. At the earliest, the budget might be approved in early October.

In terms of the timing of the stimulus effect, public investment in the form of traditional infrastructure projects tends to boost the economy two quarters after the budget bill is passed, while, on the basis of what happened in 2015, we think that premium shopping vouchers are likely to boost consumer spending two to eight months afterwards. Part of the construction of the maglev Chuo Shinkansen is likely to be brought forward, but we expect the short-term economic stimulus effect from the maglev Chuo Shinkansen to be limited.”