According senior macro strategist Steve Donzé and head of investment management Japan Hiroshi Matsumoto, the recent rally in the yen is ‘casting a dark cloud' on the Japanese economy and fears are growing that the BoJ is running out of ammunition to generate growth and inflation.
“The Bank of Japan is at a crossroads,” Donzé said. “It’s quantitative and qualitative easing programme, in operation since 2013, has failed to either push inflation towards its 2 per cent target or raise inflation expectations. Its surprise shift to negative interest rates in January was equally unsuccessful, doing nothing to arrest a recent decline in consumer prices, which in May fell at their fastest pace in three years. To make matters worse, Japan’s economy is facing a new foe in the shape of Brexit. Pressure is consequently rising on the BoJ to roll out yet more monetary stimulus. The problem is that doing more of the same will not work,” he added.
Against this background, Donzé and Matsumoto noted that the BoJ is yet to deploy its most powerful and perhaps most controversial tool; helicopter money.
Taking the plunge on this is sure to lift inflation, the pair noted, but it could tip the BoJ into a ‘technical insolvency.’
“Helicopter money is not without its risks,” Donzé said. “Negative equity and the possible loss of financial independence may hurt a central bank’s credibility and raise doubts about its ability to deliver on policy targets. However, we think that the BOJ’s failure to reach the inflation target has already damaged its reputation. Helicopter money is a way for it to repair that damage.”
They added that it is far better for the BoJ to act sooner rather than late, in their view. Deploying helicopter money would demonstrate that the BoJ has plenty of effective policy tools, and will open the door to ‘a new era of unorthodox monetary policy making.’