The idea of “people’s QE” has reignited interest in radical monetary policy. Marina Gerner looks at the lessons from Japan’s version of people’s QE – the voucher schemes of the 1990s.
What’s “people’s QE” all about?
Traditional QE involves the central bank creating money to buy financial assets, such as shares and bonds. The idea is that the extra money created will find its way to firms and households through a combination of extra bank lending and higher asset prices.
However, as the former head of the Bank of England, Mervyn King, has admitted, this may not help if firms are reluctant to borrow. So some economists have suggested that the central bank should print money to finance the deficit directly.
Other ideas are for the Bank to lend money to companies (as in the 1930s) or to use it to fund public works (“people’s QE” – Corbyn’s suggestion). A final idea is to give it directly to the population – which Japan did in the late 1990s, in the form of vouchers.
So what did Japan do?
Both supporters and opponents of voucher schemes like to point to Japan’s example. In March 1999, the Japanese government decided to give 31 million shopping vouchers to its population. Local governments handed out vouchers worth ¥20,000 each (about £100 at the time) to families and the elderly.
Families received a voucher for every child under the age of 15, regardless of their income. In contrast, vouchers for the elderly were means-tested – about 56% of the over-65s qualified.
In total, the vouchers were worth ¥620bn (about £3bn). The vouchers came with two caveats: first, they expired within six months; second, they had to be spent at shops within the recipient’s own local community.
Why did Japan do this?
Japan was stuck in its worst recession since World War II. The property and stock boom of the 1980s culminated in a massive bust at the end of that decade. From an era of almost non-existent unemployment, joblessness rose to 2.2% in 1992 and to 4.7% by 1999 following the end of the 80s bubble.
The ageing population, anxious about unemployment, salary cuts, and further deflation, was spending less on consumer goods, exacerbating the downturn. Interest rates were already around 0%, so could not be cut further to stimulate more borrowing and thus, hopefully, demand.
So Japan launched its shopping vouchers programme, hoping that this would stimulate consumer spending.
What was the general reaction to the idea at the time?
At the time, the programme was harshly criticised – few economists believed it would be successful. Rather than fearing an eruption in inflation, most simply thought it wouldn’t make a difference. Professor Masaru Takagi of Meiji University called it an “immature idea… we’re being treated like children receiving our cash envelopes from grown-ups at New Year”.
The journalist Mark Magnier asked: “Will this massive mound of Monopoly money revive consumer confidence and restore Japan’s economic pulse? Tax cuts announced in April haven’t done a whisper of good, after all.”
Currency researcher Stephen DeMeulenaere believed that the programme would have no effect: “The traditionally thrifty Japanese will simply spend these vouchers on 100% voucher purchases and keep their money in the bank.”
The programme sparked criticism of the Liberal Democratic Party, the leading party of the coalition government at the time, with critics saying that politicians had no clue as to how to revive the economy.
Did it work?
In the end, the voucher scheme had mixed success. Supporters point to an academic study conducted by Hsieh, Shimizutani and Hori (2010), which found that the coupons did indeed have a positive effect on consumer spending. In particular, spending on semi-durables, such as clothing, was pushed higher. And there was no evidence of a reversal in spending after the coupons were used up.
However, while the effect was somewhat positive, it was also very limited. Individual consumption only went up by around 0.1-0.2% of GDP and failed to increase long-run consumption. Overall, the programme did not ignite inflation or help Japan out of its economic rut.
What’s the lesson for the rest of us?
It’s hard to judge the effectiveness of voucher schemes from the Japanese experience. Firstly, since the vouchers came from the government rather than the central bank, it was really a fiscal, rather than a monetary, stimulus – so more like a tax cut than QE.
More importantly, the size of the scheme was tiny compared to the size of the Japanese economy. To put it into perspective, Japan’s nominal GDP was $4.7trn in 1999, which means that the scheme amounted to a stimulus of less than 0.2%.
And what does it mean for more radical forms of QE?
In short, it’s hard to use Japan’s voucher scheme to predict what a larger scale, genuine version of helicopter money would do – if direct QE were carried out on the scale of conventional QE, for example, you would expect it to be extremely inflationary, especially at a time when wages are finally starting to rise.
There are also concerns that using money printing to fund the deficit or carry out infrastructure projects would set a dangerous precedent and make the government much more reluctant to cut the deficit.