Money printing has only allowed governments to duck their problems

By Jeremy Warner

In the land of the setting sun, QE is now such an everyday part of the economic landscape that it would barely have warranted a mention, let alone an entire column, but for the fact that the latest dollop of “unconventional” policy action appears to be part of a co-ordinated, global response to the economic slowdown .

Like big deficits and mountainous public debt, in Japan, QE no longer generates the same agonised debate it does in the West. It just is. For Japan, the “unconventional” is now very much the conventional.

And little good does it seem to have done either. The Japanese economy remains firmly frozen in time, having barely grown for more than 20 years now. Everything is relative, of course, and it can reasonably be argued that without all this monetary and fiscal policy action, things might have been worse. Measured per head of those of working age, moreover, growth looks much more flattering, so it could also be argued that overall economic stagnation is only the inevitable result of an ageing society.

The point is, however, that neither QE, nor indeed massive, Keynesian-style, deficit spending, have managed to achieve the hoped for economic revival.

Well, now everyone’s up to it. Against the backdrop of weaker growth, central banks in advanced economies and emerging markets alike are all taking further steps to ease monetary policy. Never mind the G7 economies, since the start of the year the central banks of Brazil, China, Colombia, the Czech Republic, Israel, Korea, the Philippines and South Africa have all lowered their policy rates. Japan is just part of a global phenomenon.

What also makes the Bank of Japan’s policy action of perhaps wider interest is that it occurs against the backdrop of renewed tension in the East China seas. The Chinese slowdown is proving a big enough headache for the Japanese economy but possible retaliatory action over the disputed Senkaku islands threatens much worse.

As it happens, I’ve actually met the man who sparked the latest outbreak of hostilities, Shintaro Ishihara, mayor of Tokyo. Like his London counterpart, he’s quite a character, though very different in style and outlook. During our brief encounter he told me that the sight of the Tokyo skyline made him physically sick and suggested that the sooner Japan abandoned its nuclear taboo, rearmed and pointed the missiles west at China and North Korea, the better. Japan could no longer rely on America, he said.

He was also profoundly disappointed by Japanese youth, who most of us would regard as relatively well-mannered examples of the genre, but to Mr Ishihara were a spineless and wayward lot. A strange, dream-like quality came over him as he fondly recalled the glory days of Japan’s military past.

In any case, you couldn’t help but think that he would strongly disapprove of repeated rounds of central bank money printing. Curiously, the mayor’s offer to buy and develop the Senkaku islands might have played its part in the latest bout of it, though Masaaki Shirakawa, governor of the Bank of Japan, strongly refutes the idea. It was the soft data, Mr Shirakawa insists, not the latest slight to China, which had forced his hand.

Few expect the new QE to do much good. It hasn’t in the past, so why would it now? To supporters of the policy, the problem is simply that there hasn’t been enough of it. Despite having been at it for so long, the Bank of Japan’s balance sheet is still worth “only” 20pc of GDP. Relatively speaking, the Bank of England has already done much more, even though it has only been practising the black arts for just three years.

Even so, the net result in Britain doesn’t seem to have been any better. Personally, I was a supporter of the initial bout of quantitative easing, which seemed to me the appropriate way of countering the Depression-like collapse in money and credit which was fast establishing itself in the aftermath of the Lehman’s insolvency. But now QE seems to have hit the law of diminishing returns; it appears pretty much ineffective in getting the economy going again. Is this because the Bank of England is targeting the wrong assets?

QE has been very helpful to the Government in reducing its borrowing costs, and it has certainly been a bonanza for some bankers, but it is hard to point to any other tangible benefit. Certainly, it doesn’t seem to have notably eased credit conditions for everyone else.

Central bankers struggle to give convincing answers even on how QE is meant to work, let alone on whether it works. The best that can be said for it is that the spectacle of decisive policy action in itself might have some positive impact on confidence, but this doesn’t seem much of a payback for £375bn of money printing. QE has become a crutch - an ineffectual alternative to a proper, supply-side growth strategy.

Prolonged monetary accommodation also carries considerable risks and, as noted by the Bank for International Settlements, may even delay the return to self-sustaining recovery. As demonstrated in spades by Japan, one effect is to insulate banks and governments from the need to address their problems. The economy stagnates rather than heals.

In any event, the Fed’s approach with QE3 of targeting private mortgage assets, in preference to Government bonds, seems a potentially more promising one. The economy won’t properly turn around until consumers and companies start spending again. It’s hard to see how steadily hoovering up the national debt helps with this endeavour.