HỌC VIỆN NGOẠI GIAO VIỆT NAM
DIPLOMATIC ACADEMY OF VIETNAM
KHOA KINH TẾ QUỐC TẾ
FACULTY OF INTERNATIONAL ECONOMICS

Tiểu luận môn TIỀN TỆ NGÂN HÀNG
MACROECONOMICS II Assignment

Đề‘HELICOPTER
tài: TÁI CƠ CẤU
NGÂNTO
HÀNG
VIỆTJAPAN?
NAM
MONEY’
RESCUE
Lecturer. Pham Thi Mai Anh

Sinh Group
viên thực
hiện:KT41D
VŨ HOÀNG QUYỀN
5 - Class
Mã sinh viên: KT41D-122-1418
Lớp: KT41D
Members:

5. Nguyễn Văn Minh

1. Bùi Minh Anh

6. Nguyễn Mai Phương

2. Đào Hồng Anh

7. Nguyễn Thị Mai Phương

3. Đặng Khánh Dương

8. Vũ Hoàng Quyền

4. Ngô Xuân Lộc

9. Nguyễn Thị Minh Tâm

Hà Nội, 2015


TABLE OF CONTENTS

LISTS OR FIRGUES

2


1. What is the ‘Helicopter money’?
1.1. The history of ‘Helicopter money’
Since the global financial crisis, interest rates have remained near zero percent
in many of the world's most advanced economies in North America, Europe and the
Asia-Pacific region. Each year, central banks over the world have been doing
everything they can think of to try to get control their economic growth. In order to

stimulate growth and fight deflation, governments have effected cuts in interest
rates, turned to negative rates and many rounds of the QE or Quantitative Easing.
But GDP growth rates, whether in the US or Eurozone and Japan remain
persistently low. Hence they have to make a decision to choose a next step- the
recourse to more direct methods. Consequently, central banks are looking for new
ways to spark economic growth, such as "helicopter money", which provides an
alternative to quantitative easing (QE).
To start with, as for the history of “Helicopter money”, it is an idea based on a
metaphor used by the famous American economist, Milton Friedman nearly five
decades ago and given new life in this century by Ben Bernanke. He was awarded
the Nobel Prize for Economics in 1976. Friedman’s contributions to economic
theory are numerous. One of his earliest, described in A Theory of the Consumption
Function (1957), was the articulation of the permanent income hypothesis, the idea
that a household’s consumption and savings decisions are more affected by changes
in its permanent income than by income changes that household members perceive
as temporary. Besides, Milton’s best-known contributions are in the area of
monetary economics, where he is seen as the founder of monetarism. In the 1950s,
macroeconomics was dominated by scholars who adhered to theories promoted by
John Maynard Keynes. Keynesians and mainstream economists generally had
believed that the government faced a stable long-run trade-off between
unemployment and inflation, called Phillips curve. On one hand, in this view, the
government could increase the demand for goods and services, permanently reduce
unemployment by accepting a higher inflation rate. On the other hand, in the late
1960s, Friedman (and Columbia University’s Edmund Phelps) opposed this view.
Friedman argued that once people adjusted to the higher inflation rate,
unemployment would creep back up. According to Friedman, the only way to
reduce unemployment below required not a one-time increase but accelerating
inflation. The “stagflation” of the 1970s (literally, a combination of economic
stagnation and inflation), impossible in a simplified Keynesian framework, was
seen by many as confirmation of Friedman’s hypothesis.


3


1.2. Definition of “Helicopter money”
Afterwards, Friedman described what he believed to be a surefire mechanism
that central banks could use to generate inflation: drop currency straight from
helicopters on to the population. ‘Helicopter money’ implies free and irreversible
distribution of money to the end consumers. It can be achieved by literally
transferring money to individuals’ accounts for free or by reducing taxes universally
to all households enabling more disposable money in their hands.
1.3. Implementation
Former Federal Reserve Chairman Ben Bernanke made "Helicopter money"
concept famous. In 2002, while in office, he mentioned this concept when debating
about the problem that the central banks could push inflation whenever they want.
The nickname "Helicopter Ben" also was born here, despite the measures that he
used to prop up the economy after the worst crisis since the Great Depression only
stopped at Quantitative Easing (QE) and interest rates close to zero. In April of
2016, in a personal blog post, Bernanke continues to say that Helicopter money is
the best method which central banks can use in emergency cases.
Such measures are utilized when the economy is in slowdown or in recession
and interest rates are hovering around zero or even turning negative. The end aim
of helicopter money is to boost consumer demand and spending, and increase
inflation to optimum levels, thereby leading to economic recovery. It has emerged
as a possible alternative to the widely followed QE method. It is also known by
various other names which include Helicopter Drop, QE for the People, Strategic
QE, Overt Money Financing, Green QE and Sovereign Money Creation.
"Helicopter money" method describes the action that the central banks print
more and pump money directly into the economy by public spending, tax cuts or
direct payment to consumers. Thus, the money supply, the inflation rate and the

aggregate demand of the economy can increase. In the context of the economy
experienced a recession and in other emergency cases, this method may have a
positive effect.

4


2. Pros and cons of implementing Helicopter money
2.1. Pros
2.1.1. Boosting spending and aggregate demand
In this case, the fact people get an immediate transfer should lead them to
believe that they can afford to spend more, even if they don’t think about or
understand the consequences of the change for future conditions. They have more
money, they tend to spend more to buy goods especially poor people. Consumption
will rise and AD rises.
2.1.2. Targeting high inflation and solving the deep deflation
Deflation, or falling prices, can be deeply damaging to an economy. When
prices are falling, it makes consumers and businesses reluctant to spend because
anything they want to buy is cheaper tomorrow. It makes debt more onerous
because you have to pay it back with money that will be more valuable the next day.
These conditions can fuel a vicious spiral: Economic weakness creates falling
prices, which create more economic weakness.
Raising the money supply can solve this problem. More money floating
around, used to purchase the same amount of goods and services, would inevitably
cause prices to rise — in other words, it would bring about higher inflation, which
helps to avoid problems related to deflation and debt deflation.
2.1.3. Having more money to solve some domestic problems
Central banks could create new money electronically by “marking up” the
spending accounts of their governments. The governments would decide whether to
spend the new money on projects like rebuilding roads and bridges, or by returning

it to people via tax rebates. In either case, the economy would get a boost, and the
national debt would not be increased because the government would not be
borrowing this money from anyone.
2.2. Cons
2.2.1. Inflationary effect
It is right that when an economy experienced deep deflation, inflation is a
thing that it expects. However, it may lead to hyperinflation if the policy was not
appropriately controlled. If money supply continue to rise by this way,
hyperinflation is unavoidable issue. It can happen so quickly and cannot be
controlled. And the story is completely real in Zimbabwe after government
employed helicopter money policy. So it itself always has the risk of hyperinflation.
2.2.2. Breaking independence of Central Bank
In today's context, "helicopter money has to be a kind of monetary policy and
fiscal policy coming together as one thing", said Paul Sheard, chief global
economist at S&P Global.
5


However, this program will dissolve the symbolic barrier between the duties
of the Center Bank with the Treasury Department. In the country today, the Ministry
of Finance manages fiscal policy (including government spending, taxes,
salaries ...) while central banks manage monetary policy (interest rates, inflation,
exchange rate ...). Helicopter Money can therefore create conflict between central
bank policy and finance ministries, affecting the independence of the Central Bank.
Also, Bank for International Settlements warned helicopter money will
certainly tear down the independence of the Central Bank. It makes the public lose
the trust in the monetary institutions.
Certainly there are many things to say about the independence of the Central
Bank. In normal times, the protection of monetary policy from the purpose of the
politicians - who tend to lose the opportunity to inflation, is needed to be done.


2.2.3. Legality
President of Center Bank of Japan - Kuroda said: "If the current legal
framework does not change, then the" helicopter money "cannot be applied".
The real weakness of the "helicopter money" is just a technical solution,
while it has to solve political problems. European economy recover slowly than
Americans partly because the ECB is too slow and reluctant to want to implement
quantitative easing. European law prohibits the ECB financing to the government
and only last year, when deflation peaked, Mr Draghi- President of the European
Central Bank will be able to convince the authorities. To pursue the solution of
"helicopter money", Europe would have to amend the treaty which is the foundation
for the EU.
In addition to boosting spending, it is possible that helicopter money would
succeed in lifting inflation back to more normal levels, while providing support to
employment and economic growth. But it could also lead to excessive, unwanted
inflation if the policy was not appropriately controlled. If we look back through
history there are multiple episodes where helicopter money was employed. Two
famous cases of helicopter money include Germany in the 1920s and Zimbabwe in
the 1990s, where the policy produced hyperinflation, which is extremely damaging.
Other, more successful examples are also cited by economists, including the United
States in the 1860s and Japan in the 1930s. In both instances hyperinflation did not
ensue.

6


3. Helicopter money to rescue Japan
Japan is a country with little natural resources but during its long history,
Japan has achieved considerable success. The country has the world's third-largest
economy by nominal GDP with a $4.412 trillion in total and $34,871 per capita. It is

also the world's fourth-largest exporter and fourth-largest importer. But now, Japan
is suffering from deflation. Let’s have a look on the economic history of Japan to
figure out how such a country with little natural resources could become a
developed industrial country and why such a developed industrial country fell into
deflation.
3.1.

A brief history of Japan’s economy

3.1.1. Post-war Miracle

Before the second World War (1939 – 1945), Japan had been a developed
industrial country. The Meiji Restoration had transformed the Empire of Japan into
an industrialized world power that pursued military conflict to expand its sphere of
influence. After the war, the country was devastated: nearly 3 million people were
killed and injured, the rest suffered from lack of energy and food, 2 big cities
Hiroshima and Nagasaki were completely destroyed,… The damages was about
61.3 billion yen.
Since then, Japan has rebuilt everything from scratch. However, its economy
had grown with such an accelerated rate that shocked the most developed countries
at that time. Right after the war, Japanese government had implemented economic
reforms and recontruction to firstly democratized the Japanese economy and then to
recover the level of prewar Japan. The economic reforms included 4 main reforms:
(1) Zaibatsu1 dissolution, (2) Agrian reform, (3) Labor market reform, and (4) Fair
market rules. The economic reconstruction was economic policies which
concentrated resources in priority industrial sectors such as steel, coal mining,
electricity, shipbuilding, marine and railway transportation, and chemical fertilizer,
… Those policies helped regulate the ashes of prewar Japanese militarism, and lay
the foundations for the post-war economic miracle. Beside the policies of the
government, the aid and assistance from the US and the benefits from Korean War

also boosted Japan’s economy. As a result, the industrial production rapidly
recovered in 1950s.

1

Zaibatsu ( 財 財 , literally financial clique) is a Japanese term referring to industrial and financial business
conglomerates in the Empire of Japan, whose influence and size allowed control over significant parts of the
Japanese economy from the Meiji period until the end of World War II. The most powerful ones were Mitsui,
Mitsubishi, Sumitomo, and Yasuda.

7


The period of rapid economic growth in 19950s had paved the way for a
period called Japanese economic miracle or post-war miracle from 1960s to 1980s.
In this period, overall real economic growth was extremely large: a 10% average in
the 1960s, a 5% average in the 1970s and a 4% average in the 1980s. By the 1960s,
Japan became the second largest economy in the world. Those “Golden Sixties”
brought Japan such an incredible growth rate that made the country a global center
of manufacturing and exports. Japanese brands at that time such as Toyota, Sony,
Honda, Mitsubishi, Panasonic, and Canon would become household names
worldwide.

Figure 1. Japan GDP annual growth rate (1960s – 1980s)
3.1.2. Lost Decades

The growth has been slowed down during the "Lost Decade" since 1990s,
mainly because of the collapse of the Japanese asset price bubble in 1992.
During the late 1980s and 1990s, there was a economic bubble within the
Japanese economy in which real estate and stock market prices were greatly

inflated. This economic bubble collapsed in the early 1992 leading to a possibility
of inflation. Fear of inflation resulted in Japanese contractionary money policy. This
was the main reasons of deflation in Japan nowadays. Because of the dramatical
reduce of money supply in 1990s, the interest rate rose leading to the decrease in
consumer spending and business investment. These decreases made the aggregate
demand shift downward and thus resulted in deflation. In addition, the Japanese
asset price bubble also leaved bad – debts. A dramatical increase of bad – debts after
the collapse of economic bubble and a contractionary monetary policy made
Japanese banking system slow to response to the situation. All of those factors
officially pushed Japan into recession in 1998 with the GPD growth rate decreased
to -2%, consumer spending and business investment sharply declined, deflation
worsened than ever before.

Figure 2. Japan GDP annual growth rate (1990s – 2000s)
As a result, Japanese real GDP and GNP per capita rose only 0.5% per year,
these was slightly lower than any other developed countries at that time. Moreover,
the unemployment rate dramatically increasing annually also worsened the
8


situation. Difficult times in the 1990s made people frown on ostentatious displays of
wealth, while Japanese firms such as Toyota and Sony which had dominated their
respective industries in the 1980s had to fend off strong competition from rival
firms based in other East Asian countries, particularly South Korea. Many Japanese
companies replaced a large part of their workforce with temporary workers, who
had little job security and fewer benefits. As of 2009, these non-traditional
employees made up more than a third of the labor force. For the wider Japanese
workforce, wages have stagnated. From their peak in 1997, real wages have since
fallen around 13% - an unprecedented number among developed nations.
Moreover, the Dot-com bubble in 2000 and the financial crisis in 2008 also

damaged Japan’s economy, made it more difficult for the country to recover.

9


3.2.

Policies to eliminate deflation

Because the deflation in Japan was caused by a fall in aggregate demand and
money supply, to eliminate it, the aggregate demand and the money supply needs to
be increased. To raise those factors, government and central bank must cooperate in
imposing expansionary fiscal policy and expansionary monetary policy.
So many tactics have been carried out by the Bank of Japan and the Japanese
government to response the chronic deflation and low growth rate. Japan has
imposed so many expansionary monetary policies such as the zero – interesting
rates policy (ZIRP) in 1990s and early 2000s, the quatitative easing policy (QE) in
2000s, and the Abenomics since 2012.
In late 1990s and early 2000s, Japan had maintained the interest rate close to
zero to stimulate consumer spending and investment. However, this policy could
not raise the aggregate demand because of high saving ratio caused by confidence
crisis at that time. In July 2006, the zero- interest rate policy was ended.
On 19 March 2001, the Bank of Japan and the Japanese government adopted
the Quatitative easing policy after having the interest rate close to zero for a long
time. Huge amounts of money have been pumped into the economy. For example,
in early October 2010, the Bank of Japan announced that it would examine the
purchase of ¥5 trillion ($60 billion) in assets. This was an attempt to push down the
value of the yen against the US dollar to stimulate the domestic economy by making
Japanese exports cheaper; however, it did not work.
Since 2012 a policy named Abenomics has been imposed, as a portmanteau

of economic policies and Shinzō Abe, the current Prime Minister of Japan. The
policy consists of expansionary fiscal policy, expansionary monetary policy and
economic growth strategies aiming at encouraging private investment and consumer
spending by setting negative interest rate, reducing unemployment rate, stimulating
export by correcting the excessive yen appreciation and increasing inflation to a
target of 2% by radical quantitative easing. Despite that, Japanese real gross
domestic product (GDP) is only 2.2% larger than when Prime Minister Shinzo Abe
came into office. The Japanese government's attempts to stimulate the economy and
stave off deflation have been ineffective. For the end of the first quarter of 2016,
Japan's GDP only grew 0.5% quarter over quarter (QoQ). This requires Japan to
find another stable strategy.

10


3.3.

Japan’s Chances and Challenges of Implementing Helicopter Money

3.3.1. Chances
The potential advantages of helicopter money are clear. Unlike changes to
interest rates, stimulus paid for by the central bank does not rely on increased
borrowing to work. This reduces the risk that central banks help inflate new
bubbles, and adds to their potency when crisis or uncertainty make the banking
system unreliable. Fiscal stimulus financed by borrowing provides similar benefits,
but these could be blunted if consumers think taxes must eventually go up to pay off
the accumulated debts—a problem helicopter money flies around. It would provide
an adrenaline shot to the economy, boosting spending, growth and expectations of
future inflation. That, in turn, could eventually allow central banks to raise interest
rates back up above zero, restoring to them the use of their favoured economysteering tool.

Besides, the act of implementing helicopter money could help Japan reach
the target of 2% inflation, boosting GDP growth, consuming as well as other
statistics that show good signal for the economy.
3.3.2. Challenges
Political versus Regulatory
Coordination between stakeholders is one of the primary roadblocks for
implementing helicopter money-based stimulus. While politicians may like to
implement a cut in government spending for political gains, the central bank may
find this short term cut in spending detrimental to the long term economic recovery
it wants to achieve. Willem H. Buiter recommends in his published paper that
“Cooperation and coordination between the central bank and the Treasury is
required for the real-world implementation of helicopter money drops.”
Additionally, there is always a risk that if proved successful in slumping times, the
political class may overdo it even during stable economic periods.
Whereas, Bank of Japan is not independent completely from the
Government like Fed of some countries such as Germany, New Zealand or
Australia, so the act of implementing helicopter money could cause political unrest.
Spending versus Saving
Once the money reaches end consumers, they may decide to save instead of
spending it.
Effects on Currency

11


Economists also fear that printing more money may lead to currency
devaluation in the international markets, which would hamper economic recovery
and threaten Japan’s importing. Also, if Japan cannot be good at controlling the
process of conducting helicopter money policy, it would lead to hyperinflation
which Zimbabwe was a very typical example.


Unfortunately, helicopter money is not quite a silver bullet. Some economists
fear that it would erode central banks' independence and reduce their ability to keep
control over inflation. Yet the bigger worry is that helicopter money will never get
off the ground in the first place. The elected governments whose say-so would be
needed for money-financed stimulus to work have already declined to use more
conventional tools to get growth going: like borrowing at near-zero interest rates to
finance badly needed infrastructure investment. Instead, governments around the
rich world have opted to cut deficits, undermining central bank efforts to get
economies moving. Helicopter money, though not without risks, is a promising
policy tool. But the consensus to use it or other demand-boosting tools to get
economies out of their slumps is sadly missing.
3.4. Why is Japan Expected to Implement Helicopter Money?
Despite the stimulus packages that Japan's economy has received between
2012 and 2016, its real gross domestic product (GDP) is only 2.2% larger than
when Prime Minister Shinzo Abe came into office. The Japanese
government's attempts to stimulate the economy and stave off deflation have been
ineffective. For the end of the first quarter of 2016, Japan's GDP only grew 0.5%
quarter over quarter (QoQ). Japan's economic growth has been thwarted by its aging
population and the enormous amount of public debt that has been building. Japan's
total government debt to GDP ballooned to 229.2% at the end of 2015, a sign that
the country should focus more on growing its economy than trying to bring down its
public debt.
The Bank of Japan’s QE program pushed its 10-year government bond yields
to record lows of -0.23% as of July 20, 2016. Contrary to Prime Minister Abe’s
declaration that Japan is no longer in a deflationary period, the country is still
struggling with a decrease in the general prices of goods and services. In April
2016, Japan continued to show signs of deflation and recorded a consumer price
inflation rate of -0.0% year over year. Additionally, in May 2016, Japan recorded a
consumer price inflation rate of –0.4% year over year. This marks Japan’s consumer

prices’ third straight monthly decline in 2016.
Japan's retail sales fell by 2.1% in May 2016, which was primarily due to
Japan's decision to raise its sales tax from 5% to 8%. Consequently, Japan may be
12


forced to go to drastic measures, such as helicopter money, to drive its inflation
higher since retail sales have been declining in 2016.
In fact, there was a similar policy to "Helicopter money" which Japan
applied in 1932-1936 period. In these time, Japan was facing a serious deflation
coming from the instability after World War I and Great Depression as well. It
caused the low economic growth and unsettled financial system.
To deal with these issues, Minister of Finance Takahashi Korekiyo initiated
the equivalent of helicopter money, it called "Takahashi economic policy", using the
Bank of Japan to directly finance deficit spending by the government. He officially
announced the BOJ underwriting of government bonds. The bill and supplemental
budget passed on June 18, marking a full-fledged start of the stimulative fiscal
policy of the Takahashi era. The BOJ started underwriting government bonds on
November 25, 1932.
By 1933, Japan was already out of the depression. "Korekiyo Takahashi
brilliantly rescued Japan from the Great Depression through reflationary policies in
the early 1930s" Governor Ben S. Bernanke said on May 31, 2003. The Takahashi
fiscal policies not only created demand through expanded fiscal expenditures but
included reflationary measures aimed at restoring gradually rising prices, thereby
turning the tide of deflation. In 1933 and 1934, personal spending and business
fixed investment once again fuelled a growing economy.
To conclude, Takahashi's policy would be one of most brilliant policy
because it led Japan to escape from the Great Depression earlier than most other
countries. But there also were too much of a risk when it was out of control. Clearly,
Japan used it pretty well until its risks appeared and they had no solution to prevent

the severe inflation that caused the economic depression to Japan again.
3.4.

How Japan Could Implement Helicopter Money

A Japan helicopter money policy could be implemented with the Japanese
government issuing bonds to the Bank of Japan, which would purchase the bonds
with the newly created money. Thereafter, the Japanese government would spend
the money from the bond sales to stimulate the economy with investments or tax
cuts, or by directly sending the public checks. This would stimulate the economy
over the long term, but the Japanese public may choose to save the money received
from the helicopter drops over the short term. As of July 2016, the law prohibits
the Bank of Japan from purchasing government bonds directly from Japan's finance
ministry; rather it must purchase these bonds from intermediaries. Therefore, if
Japanese Prime Minister Abe and his administration wish to implement helicopter
money, they must first bring change to the current laws.
Although helicopter money is an unorthodox tool to spur economic growth,
there are less extreme forms of the policy if other economic tools have not worked.
13


The government or central bank could implement a version of helicopter money by
spending money on tax cuts, and thereafter, the central bank would deposit money
in a Treasury account. Additionally, the government could issue new bonds that the
central bank would purchase and hold, but the central bank would return the interest
back to the government to distribute to the public. Therefore, these forms of
helicopter money would provide consumers with money and theoretically spark
consumer spending.
REFERENCES
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7. Governor

Ben
S.Bernanke
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31,
2003
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9. />10. />11. />12. />13. />14. />fta=y
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15


APPENDIX I
THE DIFFERENCES
BETWEEN QUANTITATIVE EASING (QE) AND HELICOPTER MONEY
1. What is QUANTITATIVE EASING (QE)?
To carry out QE central banks (definition) create money by buying securities,
such as government bonds, from banks, with electronic cash that did not exist
before. The new money swells the size of bank reserves in the economy by the
quantity of assets purchased—hence "quantitative" easing.
Like lowering interest rates, QE is supposed to (purpose) stimulate the

economy by encouraging banks to make more loans. The idea is that banks take the
new money and buy assets to replace the ones they have sold to the central bank.
That (result) raises stock prices and lowers interest rates, which in turn boosts
investment.
2. Differences between Helicopter Money and QE in theory
Helicopter money is a theoretical and unorthodox monetary policy tool that
central banks use to (purpose) stimulate economies. This policy should theoretically
be used in a low-interest-rate environment when an economy's growth remains
weak. Helicopter money involves the central bank or central government supplying
large amounts of money to the public, as if the money was being distributed or
scattered from a helicopter.
Contrary to the concept of using helicopter money, central banks use
quantitative easing to increase the money supply and lower interest rates by
purchasing government or other financial securities from the market to spark
economic growth. Unlike with helicopter money, which involves the distribution of
printed money to the public, central banks use quantitative easing to create money
and then purchase assets using the printed money. QE does not have a direct impact
on the public, while helicopter money is made directly available to consumers to
increase consumer spending.
3. Differences in Economic Consequences
One of the main benefits of helicopter money is that the policy seeks to
promote economic recovery by directly stimulating aggregate demand rather than
by working indirectly through asset price inflation and through encouraging risktaking. By so doing, it would spare us from destructive round of asset price booms
to be followed by asset price busts.

16


Helicopter money theoretically generates demand, which comes from the
ability to increase spending without the worry of how the money would be funded

or used. Although households would be able to place the money into their savings
accounts rather than spend the money if the policy were only implemented for a
short period, consumer consumption theoretically increases as the policy remains in
place over a long period of time. The effect of helicopter money is theoretically
permanent and irreversible because money is given out to consumers, and central
banks cannot retract the money if consumers decide to place the money into a
savings account.
One of the primary risks associated with helicopter money is that the policy
may lead to a significant currency devaluation in the international foreign exchange
markets. The currency devaluation would be primarily attributed to the creation of
more money.
Conversely, QE provides capital to financial institutions, which theoretically
promotes increased liquidity and lending to the public, since the cost of borrowing
is reduced because there is more money available. The use of the newly printed
money to purchase securities theoretically increases the size of the bank reserves by
the quantity of assets that were purchased. QE aims to encourage banks to give out
more loans to consumers at a lower rate, which is supposed to stimulate the
economy and increase consumer spending. Unlike helicopter money, the effects of
QE could be reversed by the sale of securities.
However, aggressive QE easing by the Federal Reserve and the world’s other
major central banks spawns asset price inflation and excessive risk taking. In turn,
that sets up the stage for sharp asset price corrections when central banks start
trying to normalise monetary policy, which has the real potential to deal a body
blow to the global economy.

17


APPENDIX II
JAPAN IN 1930s

In the prewar period, however, real GDP growth reached even worse levels
between 1920 and 1930 (Figure 1). The extraordinary demand associated with the
First World War gradually vanished, after which Japan was struck by the Great
Kanto Earthquake. The rate of real economic growth was -2.7% in 1922, -4.6% in
1923 and -2.9% in 1925 as Japan experienced a deep recession in a short period of
time. The real economic growth rate stayed just 1.1% in 1930 and 0.4% in 1931,
when the global depression following Black Thursday (October 24, 1929) on Wall
Street reached Japan. But with the severe deflation caused partly by the lifting of
the gold embargo, Japan's GDP growth rate plummeted to -9.7% in 1930 and -9.5%
in 1931 on a nominal basis (Figure 3). Moreover, during the Great Depression,
governments around the world failed to take measures to rescue damaged financial
institutions or to encourage demand, instead turning impulsively to protectionism.
In contrast, government and central banks are now attempting to work out
countermeasures against the crisis.
Deflation persisted in the 1920's (Figure 3), with business firms suffering
declining revenues and bearing increasingly heavy debt burdens in real terms. In
some industries, they formed cartels in a bid to maintain prices, but these failed for
lack of cohesion. A succession of bankruptcies and buyouts continued, with the
number of machine tool makers, for example, plummeting from over a hundred in
1920 to just over ten in 1929.
To deal with these issues, Minister of Finance Takahashi Korekiyo initiated
the equivalent of helicopter money, it called "Takahashi economic policy", using the
Bank of Japan to directly finance deficit spending by the government. He officially
announced the BOJ underwriting of government bonds. The bill and supplemental
budget passed on June 18, marking a full-fledged start of the simulative fiscal
policy of the Takahashi era. The BOJ started underwriting government bonds on
November 25, 1932.
By 1933, Japan was already out of the depression. "Korekiyo Takahashi
brilliantly rescued Japan from the Great Depression through reflationary policies in
the early 1930s" Governor Ben S. Bernanke said on May 31, 2003. The Takahashi

fiscal policies not only created demand through expanded fiscal expenditures but
included reflationary measures aimed at restoring gradually rising prices, thereby
turning the tide of deflation. In 1933 and 1934, personal spending and business
fixed investment once again fueled a growing economy. However, in the same
period, by 1934, Takahashi realized that the economy was in danger of overheating,
and to avoid inflation, moved to reduce the deficit spending on military.


“If a central bank starts to underwrite government bonds, there may be no
problems at first, but it would lead to a limitless expansion of currency issuance,
spur sharp inflation and yield a big blow to people’s lives” and the economy, as has
happened in the past, BOJ Governor Masaaki Shirakawa said in 2011. The central
bank took the step in the 1930s because the debt market was “very immature,”
Shirakawa said.
According to Bank of Japan historian Masato Shizume wrote in his Bank of
Japan Review article (May 2009) that Japan recorded much larger fiscal deficits
than the other countries throughout Takahashi’s term as Finance Minister in the
1930s.

Figure 1: Growth Rate of Japanese Economy