Zero Coupon Perpetual

July 14th, 2016 6:51 am | by John Jansen |

This Barron’s story notes that some of the conversation around helicopter money in Japan focuses on a zero coupon perpetual bond. Zero coupon perpetual is sort of a financial oxymoron.  It is a stock without a dividend but since it is issued by the government there is no chance for growth. What am I missing here? Did I kill too many brain cells in the 60s?

What I am missing is that this is a transaction between the government and the central bank and the central bank does not need to worry about making money. The risk is that this is a very slippery slope and once ventured upon policy makers might be unable to resist the siren song of perpetual financing at no cost.

What a crazy world we live in!

Via Barron’s:

Japan’s “Helicopter Money” Talk Confuses Investors

We have been hearing about “helicopter money” in Japan after former Federal Reserve chairman Ben Bernanke met with Prime Minister Shinzo Abe.

Abe coalition’s super majority from last weekend’s Parliamentary election and promise of “helicopter money” has brought Japan’s stock markets back to pre-Brexit levels. The Japanese yen fell strongly as well, down to 104.29 per dollar this morning. The yen briefly touched 99 on Brexit day.

But there is a lot of confusion among investors in terms of what their perception of “helicopter money” is. Morgan Stanley finds that while some investors think “helicopter money” means “the distribution of shopping vouchers or lump-sum subsidies designed to stimulate consumption” (Nikkei reported on this), some take it to mean “a combination of quantitative easing and aggressive fiscal measures”.

How effective will the “helicopter money” be anyhow? It will all depend on the execution. Morgan Stanley’s economist Takeshi Yamaguchi said if the government is just issuing new bonds to finance spending, households and companies are not likely to spend dollar-on-dollar, expecting future tax hikes. This is a very traditional rational economics argument.

“The more fundamental point is how permanent the BoJ’s effective financing of fiscal spending is.” Therefore, the idea of a perpetual bond is being floated. If the Bank of Japan were to permanently hold and not sell into the markets bonds issued by the government, households and companies are likely to spend more.

A zero-coupon perpetual bond would be revolutionary. “The hurdle to such extreme helicopter money measures is likely very high since they appear to be at odds with the spirit of Article 5 the Fiscal Law, which prohibits the BoJ from directly financing the deficit,” wrote Yamaguchi.

Overnight, the iShares MSCI Japan ETF (EWJ) fell 0.2% and the WisdomTree Japan Hedged Equity Fund (DXJ) was down 0.2%.

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