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Helicopter money will be Japan's next big experiment: Mobius
[TOKYO] The Federal Reserve signals a reluctance to raise interest rates. The yen strengthens to 90 per US dollar. Haruhiko Kuroda decides to act.
Helicopter money is coming, says Mark Mobius, even as soon as next month.
The 80-year-old investment veteran is outlining how he expects central banks to respond to sluggish economic growth. For Mr Mobius, executive chairman of Templeton Emerging Markets Group, traditional easing measures have just made people save instead of spend or borrow. Combined with a stronger yen, he says that's going to force the Bank of Japan governor to contemplate a policy he's repeatedly ruled out.
"They're really beginning to think what ammunition they have," he said in an interview on a visit to a typhoon-struck Tokyo this week.
"The first reaction is to say, OK, let's go for helicopter money, let's get money directly into the hands of consumers," he said. "I think that would probably be the next step."
Central bankers have flooded their economies with monetary stimulus in the eight years since the global financial crisis, driving up asset prices - including the stock markets that Mr Mobius invests in - while struggling to kickstart global growth. A foray into negative interest rates in Japan has been met with the yen surging to about 100 per US dollar, falling stocks and dwindling bank profits.
Helicopter money, a kind of last resort in unconventional monetary policy, comes in several forms. The most simple is printing money and giving it to the public, hoping - and even creating incentives that - they'll spend it. Others include financing state spending directly, or in other words putting money into the hands of companies.
For Mr Mobius, who follows Japan's economy closely because of the nation's trade relationships with emerging markets in Asia and around the world, qualms about the possible side effects of helicopter money may condemn it to failure.
"I think they will engage in helicopter money with great care and great reluctance, and of course if they do it carefully it won't have the desired effect," he said.
"They'll probably wait until, let's say the yen reaches 90, before taking action."
Weaker US Dollar
Mr Mobius sees a weaker US dollar helping to bring this about. Despite increasing bets the Fed will raise interest rates, he says it won't do so anytime soon, and even if it does, it won't be by much. Investors are waiting for Fed Chair Janet Yellen's speech Friday in Jackson Hole for clues on her thinking.
Mr Kuroda has instigated a review to study the effects of Japan's unconventional policy, which have waned, and is due to report back on the results next month.
Not only are negative rates failing to weaken the yen, the BOJ is running out of bonds to buy under its quantitative easing program. Still, the central bank head has previously said that helicopter money isn't on the table and is prohibited by current laws.
Mr Mobius says there's concern the policy would lead to rampant inflation, as well as questions about whether it would be effective in increasing tax revenue in a country where the national debt is about 250 per cent of gross domestic product.
"They would love to engage in helicopter money, but at the same time they've got to figure out their fiscal situation," he said.
"It would not necessarily have an impact of providing higher taxes."
Mr Mobius stepped down from day-to-day management of Templeton's emerging markets group earlier this year, while remaining as chairman. He says his life hasn't changed much since then. The Templeton Asian Growth Fund, which has about US$4.7 billion in assets, has gained 15 per cent this year to beat 85 per cent of competitors, according to data compiled by Bloomberg. Over a five-year period it's down 1.8 per cent, among the worst performances compared to its peers.
Investors are parsing Mr Kuroda's comments for hints of what he'll do next, aware that they're not always reliable indicators. There's a "sufficient chance" the BOJ will add to unprecedented easing at next month's meeting, Mr Kuroda said in an interview published last weekend in the Sankei newspaper.
Regardless of what steps Mr Kuroda takes, he and other central banks have been "somewhat misled" in their theories to date, according to Mr Mobius. Another question is when governments around the world will overhaul their economies. In Mr Mobius's view, it isn't just Japan that's failed to fire the so-called third arrow of structural changes.
"You see that in Europe, you see it in the US," he said.
"There hasn't been real reform to make it easier for people to do business, to hire and fire people and generally move forward. This is the big dilemma facing all these governments."
Despite his negative assessment of the world's central bankers and leaders, Mr Mobius says there isn't one Asian market where he's bearish on stocks. He says the quest for yield amid low interest rates has helped boost emerging equities.
Meanwhile, companies have been using the easy monetary conditions to buy back shares and splurge on acquisitions, which is driving up stock prices without being productive spending.
Mr Mobius once studied mass communications in Japan for five months, and says his Japanese teacher at Syracuse University was a daughter of wartime Prime Minister Hideki Tojo. He has a mixed view on the country's stocks, and it's more about the currency than the next adventure in monetary policy.
"In yen terms, the Japanese stock market doesn't look too great, but in dollar terms it looks terrific," Mr Mobius said. The benchmark Topix index is down 16 per cent in 2016 when measured in local currency, against a 1.5 per cent gain in US dollars. The yen has risen 20 per cent against the greenback. The Topix fell 0.2 per cent in trading on Thursday.
"It looks like that yen strengthening isn't going to stop anytime soon," he said.