Bank of Japan may resort to more extreme measures

Subject

Outlook for monetary policy in Japan.

Significance

The Bank of Japan (BoJ) has called for a comprehensive review of economic activity and prices at the next board meeting on September 20, the first such review since early 2013, soon after Prime Minister Shinzo Abe's election. Consumer prices have been flat for most of the past year despite the BoJ's 2% inflation goal. Economic activity has moved fitfully between growth and recession, averaging around 0.5% annually. A massive increase of the monetary base is only weakly influencing business and consumer spending.

Impacts

• The government's latest fiscal stimulus will probably be closer to 7.5 trillion yen than the headline 28-trillion-yen figure.
• Helicopter money would undermine the government's efforts to achieve its goal of primary fiscal balance by 2020.
• The main risk of helicopter money would be hyperinflation -- a long-term risk rooted in politics.