Report on ‘helicopter money’ raises concern among banks

Cape Town / Bloomberg

Mitsubishi UFJ Financial Group Inc led a rally in Japanese bank shares after the Sankei newspaper reported that policy makers are considering allowing the central bank to directly finance government stimulus spending.
MUFG, Japan’s largest bank, closed 5.3 percent higher in Tokyo trading on Wednesday and was the best performer on the Topix Banks Index, which jumped 3.9 percent. The benchmark Topix gained 1.1 percent.
Bank shares remain the worst performers in Japan this year after the central bank’s introduction of negative interest rates dimmed the outlook for lending profit. So-called helicopter money would provide the Bank of Japan with an alternative policy tool as it seeks to end the deflation that’s still plaguing the world’s third-largest economy. “If government debt is partially financed by helicopter money, it would raise inflation expectations without a deepening in the BOJ’s negative interest-rate policy,” Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo, wrote in a July 12 report. “This would imply wider lending margins and should thus be extremely positive for bank shares.”
This year’s stock rout has left Japanese banks including MUFG and Sumitomo Mitsui Financial Group Inc. trading at less than half the book value of their assets. They could rise to a range of 0.7 times to 1 time book value if Japanese policy makers successfully adopt helicopter money, according to Haitong International Securities Group analyst Michael Makdad.
Such a policy step could shift bank valuations to a “positive new paradigm,” Tokyo-based Makdad wrote in an e-mailed note Wednesday. Large fiscal spending could increase loan growth if it creates new business opportunities and boosts the economy, he said.
The Sankei newspaper reported earlier that officials around Prime Minister Shinzo Abe are considering helicopter money as an option. Chief Cabinet Secretary Yoshihide Suga later told reporters that this isn’t the case.
Abe adviser Koichi Hamada said in an interview on Wednesday that boosting fiscal and monetary stimulus at the same time would be a good strategy, although employing helicopter money would be a “very risky gamble.” Japan’s government is preparing a fiscal stimulus package, while the BOJ’s policy board next meets on July 28-29.