“Get To The Chopper”: Japan Election, Bernanke Visit Fuel Helicopter Money Rumors

We’ve talked plenty in these pages about the ebb and flow between the Japanese yen and risk assets. Simply put, the yen is a safe haven currency. When you wake up to see it’s appreciated sharply against the dollar in the overnight session, you can pretty much immediately infer that the mood out there is “risk-off.”

The generalized feeling of angst that hangs over global markets (despite the post-Brexit rally and the attendant collapse in vol) is visible in positioning. Have a look at how investors are positioned on the yen:

(Charts: Deutsche Bank, CFTC)

So long, folks (pun fully intended).

And that’s not just a product of geopolitical jitters. The market also believes the Bank of Japan may have met its Waterloo when it comes to easing. The introduction of negative rates in late January was met with a strong yen rally which seemed counterintuitive until you considered what it signaled. Basically, that was the market interpreting negative rates as a tacit admission by the central bank that nothing is working to drag Japan out of the deflationary doldrums.

Well, it’s safe to say some people got caught wrong-footed because this is what happened overnight:

So that’s the Nikkei and the USDJPY (inverted for simplicity’s sake). Japanese stocks soared 4% while the yen slumped. That’s the reason US stocks opened at all-time highs on Monday.

The reason for the jubilant Japanese session was Prime Minister Shinzo Abe’s landslide victory in the country’s Upper House. Without plunging you into the world of Japanese politics, the win basically clears the way for more ‘Abenomics’, the economic agenda that will likely go down as one of the worst failures in the history of central planning (that’s no exaggeration).

More specifically, the triumph of Abe’s ruling coalition combined with a visit by former Fed chair Ben Bernanke has the market betting that Japan is on the verge of announcing the fabled “helicopter money” in its fiscal stimulus form. Here’s what SocGen had to say this morning:

“With PM Abe’s economic policies being approved by voters, the government is set to follow through with the LDP campaign pledge promising the expansion of the economy through further implementation of Abenomics policies. The pledge states that the government will implement policies to further speed up the positive economic cycle the economy is currently in and that the expansion of the economic pie is necessary in order to make a society promoting dynamic engagement of all citizens. The pledge also states that the government is committed to raising Japan’s nominal GDP to JPY600tn (currently JPY503.2tn) through major economic policies aimed at stimulating domestic demand. It is likely that a large-scale economic stimulus programme, in the magnitude of JPY10tn (2% of GDP), will be implemented in order to restart Abenomics.”

“However, with criticism directed at the BoJ for allegedly financing the government (and ‘helicopter money’) emerging, the BoJ will likely step forward with additional easing before the government implements further fiscal expansion in order to forestall such criticisms.”

In other words, the BoJ may give it one more go with a boost to its ETF buying program and/or another rate cut before everyone throws in the proverbial towel and fires up the rotors. Here’s a colorful take from FT:

“The yen has taken a slide in afternoon trade. Details are sketchy at this stage, but former Federal Reserve chairman Ben Bernanke has been spotted visiting the Bank of Japan, where he may (or may not) have told governor Haruhiko Kuroda to, in the immortal words of Arnie, GET TO THE CHOPPER!!!”

“In recent days, markets had been intrigued by talk that Mr Bernanke would be visiting his opposite number in Japan, and the possibility he might be there to discuss Brexit and BoJ monetary policy.”

“What really has markets interested is whether than means the two central bankers might discuss the possibility of the BoJ adopting so-called ‘helicopter money’”.

So why should anyone in the US care? Well, markets have long speculated that Japan would be first up to bat with helicopter money and if they meet with any semblance of success, you can expect the discussion to shift in that direction in other locales that are fighting persistently low inflation and lackluster growth (ahem… Europe).

This will all be positive for risk assets in the short-term, but over the long-term the obvious question becomes this: what happens to inflation expectations when the light bulb finally flickers on for the general public with regard to what it really means when central banks directly finance government spending? Hint: Google the two words “Weimar Republic.”

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