More and More Investors Think Central Banks and Governments Will Bring Out the Chopper

Time to dig deeper into the unconventional toolbox.

Will Helicopter Money Really Help Japan's Economy?

Investors are awaiting unprecedented coordination from monetary and fiscal policymakers to kick-start their economies, with Japan seen as the most likely first actor.

Nearly one-third of clients and colleagues surveyed by Citigroup Inc. think that so-called helicopter money could be on its way within a fortnight, as the Bank of Japan meets at the end of July.

"Among respondents, only 31 percent personally thought helicopter money was coming, while 43 percent thought the market expected some form of helicopter money," wrote strategists led by Global Head of G10 FX Strategy Steven Englander.

Helicopter money was first discussed by Milton Friedman back in the 1960s, when he made the case that central banks could simply print money and have it rain down on the populace in order to boost consumer spending and inflation. It's now better understood as a central bank-financed tax cut or set of public works projects, and in many respects is virtually the same as quantitative easing if central bank asset purchases are not unwound afterwards.

Suspicions that Japan might be the first economy to enact such helicopter money only rose after one of Prime Minister Shinzo Abe's advisers indicated that former Fed Chairman Ben Bernanke recommended it in April as the best way for the island nation to win its decades-long battle against deflation.

Bernanke visited Japan earlier this month to offer his advice on the possible options monetary and fiscal policymakers could pursue.

Worldwide, online search interest in "helicopter money" has spiked to reach its highest level on record, according to Google Trends.

Source: Google

Separately, Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett opined that helicopter money would be the best option to bring money into risk assets, a common goal of monetary stimulus, particularly of the unconventional variety.

Cash levels, according to Bank of America's Fund Manager Survey, just hit their highest levels since November 2001 at 5.8 percent, wrote Hartnett in a note titled "Fiscal choppers would chop cash."

More stimulative fiscal policy would be a "typical catalyst for risk," he added.

Respondents to this survey also anticipate that helicopter money is on the way, but on a less ambitious time frame than those surveyed by Citi.

Almost 40 percent expect a major central bank to adopt a policy of financing a more accommodative fiscal stance within the next 12 months — a marked jump from June's results.

Source: Bank of America Merrill Lynch

The tide seems to be turning towards a more expansionary fiscal stance by central governments in advanced economies in general.

In Canada, Justin Trudeau's Liberal Party won the 2015 federal election pledging to invest in infrastructure and run deficits in the process, a break from Stephen Harper's Conservative Party, which had balanced the budget ahead of the vote.

More recently in Japan, Abe is planning to launch a "broad, bold" fiscal stimulus package in the wake of his coalition's victory in the upper house elections.

News of this nature is likely to be music to the ears of fund managers surveyed by Bank of America.

"A record net 44 percent of investors think global fiscal policy is currently too restrictive," concludes Hartnett.