Longer-term interest rates have risen slightly over the past week. Australia’s 10-year bond yield rose from just below 2% to just above (2.03%). That move is almost certainly temporary in our view.

The upward movement in the Australian 10-year bond yield has been remarkably small given that the share market (ASX 200) had a really strong week lifting by 3.8%. Normally there is a strong negative correlation between the performances of bonds relative to shares. When shares are strongly in favour, as they were last week, investors usually desert “safe haven” bonds. The muted reaction of the bond market to the strong rise in shares speaks of how entrenched the low interest rate environment has become.

The rally in shares last week came partly in recognition that central banks stand ready to ease monetary conditions even more if needed. There was also speculation that apart from easier monetary conditions, one country, Japan, might be close to considering a monetised easing of fiscal policy – “helicopter money”. In basic terms, helicopter money is an increase in government spending with a simultaneous expansion of the money base by the central bank to fund it.

Some argue that helicopter money may prove to be much more effective lifting spending in the economy than monetary policy change, including the various unconventional or QE moves by several central banks over the years since the global financial crisis. One of the problems associated with monetary policy easing around the world during that period is that it has occurred while many countries have been trying to repair budgets by reducing spending. The effect of trying to push the monetary policy accelerator to the floor boards has been offset by governments applying the fiscal brakes at the same time.

Helicopter money, in contrast has monetary policy committed to reinforcing an expansion of government spending. Effective use of helicopter money also implies the government abandoning any plans of balancing budgets in the future. Instead rounds of monetised government spending are applied repeatedly until a particular inflation or growth target is achieved. The helicopter money idea is very different from current budget thinking based on the need to return the budget to surplus over time and cap government debt outstanding. The idea of helicopter money is so challenging to current thinking about government budgets that it is hard to imagine the political circumstances that would allow its adoption in Australia or many other countries.

In Japan, however, still struggling to grow consistently more than a quarter century after its great asset price bubble of the late 1980s burst, talk is increasing that the Government might consider helicopter money. Two events have made the talk louder over the past week or so. The first was the landslide upper house election win for Prime Minister Shinzo Abe’s Liberal Democrats and partners. The second was the visit to the Bank of Japan of ex-Federal Reserve Chairman, Ben Bernanke who has written much about helicopter money. The possibility, even if still relatively remote, that Japan might adopt helicopter money, helped to lift Japan’s share market (Nikkei 225) by 7.3% last week.

The rallies in share markets last week were some of the strongest in the past two years, but they occurred not out of conviction that the global economy was improving to the point where company earnings may be able to lift on a broad front, but rather that the central banks have something else up their sleeves that may help to prod languishing global growth on to a firmer growth path.

What is increasingly more certain is that the work of the central banks around the world to revive moderate inflation and a period of consistent growth is still far from over. Even senior officials of the RBA are starting to talk about the possibility that Australia may need to use unconventional monetary policy easing at some stage even if only in defense against the measures adopted by central banks elsewhere.

That small flip up in longer-term bond yields last week may go further, but ultimately interest rates cannot rise far while growth in many countries, including Australia, still needs support from easy monetary conditions. Indeed it is likely that interest rates will plumb new lows periodically over at least the next year or two.

The current era of very low interest rates has already lasted the best part of a decade, but it looks set to last much longer yet until the outlook for global economic growth looks persistently strong again. Getting to that point would seem to require even more monetary policy easing than has occurred so far and possibly a change of thinking on budgetary policy too.