“Spaced Out Helicopter Money”

This week I had the privilege of attending Bloomberg’s Most Influential Summit in Hong Kong. The summit touched on on many global macro economic issues with financial services’ super stars serving as panelists.

Since the BOJ announcement last week, I have been trying to make sense of their new actions. At first glance, it appears that the BOJ disappointed. Kuroda-san refrained from reloading the free money bazooka, and the Yen strengthened. However on the Global Currencies panel, Danny Yong, CIO & Founding Partner at Dymon Capital Asia, made comments that crystalised my interpretation of the BOJ’s latest actions. He stated that the latest actions by the BOJ was “Spaced out helicopter money”.

The BOJ unveiled Quantitative and Qualitative Monetary Easing with Yield Curve Control (QQE). The BOJ deposit rate remains at negative 0.1%, and they agreed to buy 10 year Japanese Government Bonds (JGB) such that the yield does not rise above 0%.

Only the Japanese government can issue the bonds the BOJ is buying. If the BOJ has told you that it will keep the yield below 0% (meaning free money), you will issue 10 year debt. The BOJ is effectively monetising any 10 year government debt that is issued. That is the definition of helicopter money.

I believe the market does not fully appreciate the magnitude of this policy. Mostly because the government has not yet embarked on any new large scale fiscal stimulus. Now that Abe-san can explicitly issue debt for free, he will ramp up fiscal spending. Into what sectors of the Japanese economy that money goes is anyone’s guess, but more government largesse will result in a weaker Yen.

With Japan stealthily outright monetising the government’s future debt issuance, USDJPY is set to fly. Japanese citizens will respond by hoarding cash to escape negative deposit rates, and speculating on non-JPY assets to preserve wealth. As I have mentioned many times, Japanese households are prolific FX speculators. As Bitcoin gains both governmental (the FSA has declared Bitcoin a currency and exempt for GST tax) and investor adoption, volumes in Japan will continue to rise. Japanese speculators will join their Chinese comrades in driving the price higher.