BoJ: Kuroda rules out Japanese helicopter money - ING

James Smith, Economist at ING, notes that speaking on BBC Radio 4 today, Gov. Kuroda indicated that there is “no need and no possibility for helicopter money” and reiterated that there no limitations to the BoJ’s current stimulus framework.

Key Quotes

“Whilst this may trigger memories of January, where Gov. Kuroda famously ruled out negative rates shortly before the January meeting, it reiterates our view that next week’s decision will focus on an expansion of existing policies rather than looking at forms of helicopter money.

We think that the BoJ is most likely to expand stimulus via credit easing, by increasing the rate at which the bank purchases ETFs or potentially following the ECB by expanding their stock of corporate bonds. With mounting concerns about the longevity of the JGB purchase programme, given concerns about market liquidity and the declining stock of available government bonds, we feel that an expansion of the BoJ’s existing 80 trillion Yen annual JGB purchase target is unlikely. We also think a rate cut is unlikely, given elevated concerns about bank margins.

More importantly though, the focus is now on the details and size of PM Abe’s supplementary budget that he announced back in June. Our base case is that this will equate to 10 trillion Yen, or 2% of GDP, which would complement the government’s earlier decision to front-load the majority of FY16 infrastructure spending before September. However, there have been press headlines suggesting that the final budget could come in closer to 20 trillion Yen. In any case, an announcement on this is expected to come at some point in the next few weeks.

Further down the road, it is certainly possible that we see policymakers move closer towards adopting helicopter money (or more technically, direct monetary financing). However, with concerns mounting about the longevity of the BoJ’s stimulus measures in their current form, a transition towards some form of alternative policy framework over coming months looks likely.

Market Implications:

As we have been cautioning in recent weeks, risks of a disappointment in global monetary easing expectations are fairly high and this could have profound implications for risk assets in the near-term. USD/JPY’s one big figure move lower following Governor Kuroda’s helicopter money comment is confirmation that markets have been expecting major central banks to forcefully step-in and shore up domestic demand following the shock Brexit outcome last month. As such, we expect to see further comments like today from central bank governors looking to manage expectations, with now an even greater focus on President Draghi’s tone at today’s ECB meeting (CET 13:30).

Nikkei futures suggest that we may get a sharp-risk off move when Asia markets open tomorrow and this is likely to see the yen extend its post-Kuroda gains. Further USD/JPY downside is possible ahead of next week’s BoJ meeting (29 Jul) and we see outside risks of a sharp move down to 103.50 this week (should the fallout from Kuroda’s comments today persist over the coming days).”