Helicopter money is a hot topic in the financial world right now, and the country that is widely expected to be the first to embark on this unconventional monetary policy journey is Japan.

There are many ways Japan can implement helicopter money, but the most discussed is the introduction of zero-coupon bonds.

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The introduction of these zero-coupon bonds would amount to a debt restructuring. The bonds would be issued by the Bank of Japan to replace Japanese Government Bonds.

The most important aspect of these zero-coupon securities is that they will never be repaid and Japan’s government will not be required to pay any interest on the debt. By implementing this policy, Japanese policymakers will remove any concerns that taxes may be increased to pay down the deficit and meet interest costs. Further, eliminating a significant portion of Japan’s debt interest bill (analysts believe the zero-coupon program will be small first) should work as a fiscal stimulus. Currently, 23% of government tax receipts are used to service debt and without this burden, Japan’s government would be able to pass through consumer and corporate tax cuts.

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The BOJ has plenty of options when it comes to the question of how it should implement an unconventional monetary policy ‘helicopter drop’.

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The zero-coupon bond idea could be applied to just one class of regular JGBs to act as a stimulus for a particular sector. The Ministry of Finance has five different types JGBs (excluding short-term bills): deficit bonds, construction bonds, zaito bonds, earthquake recovery bonds, and refinancing bonds.

Japan’s Zaito bonds

Zaito bonds are a special kind of investment JGB and a count for a small percentage of the total number of outstanding Japanese Government Bonds. The Zaito bonds are issued in order to finance the Fiscal Investment and Loan Programme, which is defined by the Ministry of Finance as:

“The program provides long-term, fixed- and low-interest loans and long-term risk money for projects that are required politically and for fwhich reliable payment is expected but which are difficult for the private sector to handle. Specifically, FILP uses three methods of loan (fiscal loan), investment (industrial investment) and guarantee (government guarantee) to provide funds through government-affiliated financial institutions and other organizations for such purposes as supporting cash flow for small and medium-sized enterprises, providing scholarship loans and securing interests in overseas resources.

Given the current severe fiscal conditions in Japan, FILP has apparently grown even more important as a fiscal measure that does not depend on tax revenue.”

Zaito bond repayments are financed by repayment of loans made whereas all other JGBs are repaid from tax revenues. Moreover, the duration and structure of JGBs is completely independent to zaito bonds to the stage where even if there were an increase in zaito bond issuance, there would not necessarily be an increase in average duration.

Japan's Zaito Bonds
Japan’s Zaito Bonds