By Simon Bond

As it goes, the Japanese economy is a good laboratory experiment for the rest of the world further down the track. It is of immense interest then that the former Fed Chairman, Ben Bernanke, has recently been visiting the top brass in Japan and giving them some advice on the way forward.

At the very beginning of a meeting with Bernanke at his residence, Prime Minister Abe reportedly said: “We are only halfway to the exit from deflation…We want to be steadfast in accelerating our breakaway from deflation.”

In an April 11 article posted on his Brookings Institution blog, Bernanke argued in favour of helicopter money, as follows: “…under certain extreme circumstance — sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies — such programs may be the best available alternative. It would be premature to rule them out.” Koichi Hamada, an Abe adviser who also attended the meeting with Bernanke, hinted that Bernanke may have discussed helicopter money with officials he met with during his visit, including Kuroda and MOF policy makers.

This implies that helicopter money — a combination of ultra-easy monetary policy combined with massive fiscal stimulus — could be a more reasonable choice for Japan’s policymakers. The Nikkei reported on Monday last week that the amount of new stimulus could exceed 10 trillion yen ($97 billion). Finance Minister, Tarō Asō said on Tuesday last week that he will consider the package as soon as Abe orders it, and on the same day, Economy Minister, Nobuteru Ishihara said he will compile a list of stimulus measures later this month, making full use of the low-interest-rate environment. Ishihara said it is possible that Japan will issue construction bonds to finance the stimulus package.

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 the so-called “helicopter money,” strategy. But despite Bernanke's insistence to keep his mouth shut about what transpired during his historic meeting, information 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 Government 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 monetisation 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.