As previewed last week in “Something Big Is Coming: Bernanke To “Secretly” Meet With Kuroda; “Helicopter Money” On The Agenda”, the week’s key event, albeit behind closed doors, was the surprising meeting between Ben Bernanke and the BOJ’s Kuroda as well as Japan’s prime minister Abe. The outcome of the meeting has been, as we expected, nothing short of a whirlwind reaction in markets where speculation that Japan is set to become the first nation to openly espouse “helicopter money”, or central bank funded fiscal policy stimulus, has seng the Yen plunging (at least check the USDJPY was above 104), the Nikkei soaring and unleashed a global “risk on” wave.
But what was actually said?
Since the meetings were held in private, nobody will ever know, although one can infer based on the upcoming actions by the BOJ and the Japanese Ministry of Finance, both of which are expected to boost monetary and fiscal stimulus, respectively, in the coming weeks, with Japan expected to unleash a new fiscal stimulus of around JPY 10 trillion or more. As such, we have to rely on heavily filtered and watered down official interpretations of what the Citadel analyst and Brookings blogger told the BOJ.
According to the WSJ, the former Federal Reserve Chairman Ben Bernanke rejected the notion that the Bank of Japan is short of ammunition when he met with Prime Minister Shinzo Abe Tuesday. Bernanke noted during the face-to-face meeting that Japan’s central bank still has a range of monetary easing measures at its disposal, according to Chief Cabinet Secretary Yoshihide Suga.
This contradicts BOJ executive director, Kazuo Momma, who just yesterday said that the Bank of Japan will need to reduce the pace of its record purchases of government debt as it is approaching the limits of the bond market. “Of course they can’t keep stacking up 80 trillion yen ($784 billion) of bonds forever,” said Kazuo Momma, who worked at the BOJ until the end of May. “They are aware they are nearing the limit, whether that is now or later.”
“With that awareness, it’s not impossible that they will increase the pace from 80 trillion yen to 100 trillion yen or 120 trillion yen, but it’s incredibly difficult,” he said in an interview on Monday in Tokyo. “Based on common sense, you’d think they’d start considering reducing the pace a little bit in the near future.”
Alas, common sense was never Bernanke’s strong suit who according to rumors urged the BOJ to do precisely the opposite, namely monetize even more debt, however since the BOJ is indeed running out of bonds to buy, it would need to government’s assistance and issue even more debt, ostensibly to fund “infrastructure projects”, which would then be promptly monetized by the central bank.
Sure enough, Bernanke recommended the BOJ coordinate its policy with fiscal measures aimed at shoring up Japan’s economic output to end over a decade of deflation, according to Mr. Suga.
Bernanke refused to speak to reporters following the talks at Mr. Abe’s office. The meeting lasted for a half-hour.
Brushing aside a view among Japanese economists that BOJ policy has reached its limit, Mr. Bernanke’s assessment added to speculation that Tokyo will unleash new rounds of fiscal and monetary stimulus to reboot Abenomics, Mr. Abe’s growth plan.
Mr. Bernanke visited Tokyo at a time of intense speculation that Mr. Abe may resort to so-called “helicopter money,” a radical form of monetary easing advocated by the former Fed chief. The strategy involves a central bank directly financing government spending or tax cuts. Japan once implemented the measure in the 1930s-40s and ended up stoking sky-high inflation.
But despite Bernanke’s insistence to keep his mouth shut about what transpired during his historic meeting, the answer leaked out anyway: Koichi Hamada, a close adviser of the prime minister, said Mr. Bernanke may have discussed helicopter money with Japanese officials he met with during his visit, including BOJ Gov. Haruhiko Kuroda and Ministry of Finance policy makers. Hamada, a Yale University professor, attended Tuesday’s meeting with Bernanke and Abe.
As a reminder, Mr. Bernanke said in a blog in April that monetization by a central bank could be the “best available alternative” under extreme circumstances, for example when demand is very weak but a central bank is out of ammunition and parliament is unwilling to rely on borrowed spending.
And just like that, the final phase of monetary policy – incidentally a very familiar one to the Weimar Republic – is about to begin, with helicopter money first coming to Japan, to be tried out as a trial balloon, and then everywhere else.
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