Cheap money doesn't buy growth

Zhu Qiwen China Daily, China

The G-20 Finance Ministers and Central Bank Governors Meeting in Shanghai this week should try to drive home the message that cheap money has not been able to resolve the 2008 global financial and economic crisis. And to avoid a repeat of that disaster, policymakers must seize the opportunity the Shanghai meeting offers to generate a new sense of urgency.

Last week, the Organisation for Economic Cooperation and Development (OECD) lowered its forecast of global growth for this year from 3.3 per cent to 3 per cent.

Such a dim global growth outlook is in line with the disappointing start of all major stock markets so far this year as well as the shocking 70 per cent plunge in the price of crude oil since early last year.

But this is definitely not what the unconventional monetary measures adopted by the central banks of rich countries had promised to deliver.

By drastically cutting interest rates to abnormally low levels in the wake of the worst global recession in more than seven decades, developed countries' central banks once made a compelling case for cushioning their economies from a deep fall by easing the burden on home mortgages and other loans.

More than seven years on, there is still no clear sign that the world economy is anywhere close to finding a solid footing amid an unprecedented flood of cheap money.

As more central banks have stepped into the uncharted zone of negative interest rates, the public is increasingly suspicious of the supposed effects of such monetary magic.

Worse than such failed monetary stimulus is central banks' manifested hesitation to call an end to those super loose monetary policies.

After claiming the strongest growth among developed economies for a while, the US Federal Reserve finally raised interest rates in December after several years of near-zero interest rate. Yet just a few months later, the Fed has become cautious, indicating its inclination to abandon its forecast of four rate hikes this year and giving rise to fears of quantitative easing being re-introduced.

If that is really the case, the credibility of central banks, not only their policies, will be at stake.

Given the increasing evidence of the ineffectiveness of cheap money in boosting productivity, policy- makers who gather in Shanghai should call for a thorough review of the possible short- and long-term effects of the cheap money therapy.

This is important, for market confidence hinges more on better coordination of growth policies among major economies than mindless printing of currencies.

Japan needs growth plan plus monetary policy

Editorial The Yomiuri Shimbun, Japan

Helping the nation escape from deflation and realise an economic recovery requires a good combination of monetary policy and growth strategy.

Nearly a month has passed since the Bank of Japan decided to introduce a negative interest rate policy.

Subsequently, the yield of newly issued 10-year government bonds - the main barometer of long-term interest rates - dipped into negative territory for the first time.

Leading Japanese banks and other lenders lowered mortgage rates to record-low levels one after another.

The extensive lowering of interest rates is expected to boost investment in plants and equipment by companies, housing purchases by individuals and other economic activities.

The Bank of Japan had continued its "quantitative and qualitative monetary easing" programmes of increasing the money supply by buying such financial assets as government bonds.

As the central bank now owns more than 30 per cent of outstanding Japanese government bonds, speculation is spreading in the market that its means of easing will sooner or later run into a wall.

The central bank's negative interest rate policy is also meant to demonstrate, both at home and abroad, its resolve to enhance its policy continuity by expanding options available for monetary easing and to tenaciously tackle the challenge of overcoming deflation.

Following the bank's decision on adopting the negative interest rate policy, however, stock prices declined further and the yen advanced more on financial markets, giving rise to scepticism about the effect of the additional monetary easing.

Declines in banks' profits due to the lowering of lending interest rates will weigh on banks' management. And cuts in pension benefits for pensioners and negative interest rates applied to individual depositors will adversely affect people's lives. More than a few are also worried about such negative effects.

Using low interest rates as a lever, financial institutions should find new loan borrowers, including small and medium-sized companies and start-ups, and make use of the low rates as an opportunity to enhance their earning capacity.

The current market turmoil in Japan has primarily stemmed from overseas factors, such as drops in crude oil prices, the economic slowdown of China and other newly emerging economies, and an uncertain outlook of the US economy.

The effect of monetary easing policy should be assessed from a long-term perspective.

The important thing is to steadily implement an effective growth strategy while monetary policy helps shore up the overall economy.

Economists are calm, even if equities are not

Paul Donovan The Jakarta Post, Indonesia

Once again, economies and markets seem to be moving in different directions.

This divergence may well continue.

The relationship between equities and economies is a lot looser than people think - the S&P is not a barometer for the health of the US economy, the Nikkei tells us little about Japan, and the FTSE has barely a hint of a British accent.

Here are five reasons why equity volatility may well be ignored in the real world:

•Equities are a tiny part of the economy.

•Economies are service sector dominated, equity markets are not. There often seems to be an assumption that the composition of the equity market should be the same as the composition of the economy - but this is just not true. Equity markets disproportionately favour the manufacturing and commodity sectors.

•Cost of capital is not a problem at the moment. One way that equity market weakness can impact an economy is by increasing the cost of companies raising capital. Large companies do use the equity market to raise funding. However, the global economy today is hardly capital constrained.

•The wealth effect from equities is limited. Most people do not own equities. The asset that matters to most people is housing - home ownership is a critical part of household wealth in many countries. The increase in house prices in the US and the stability of property prices in top-tier cities in China more than offset the movement in equity prices for most of the economy. Moreover, wealth effects tend to have less importance if the labour market is strengthening. The strength of the US labour market, with more and more people getting pay increases, is what matters to growth. Even the European labour market, long a source of concern, is starting to improve.

•We have not (yet) seen a more general crisis of confidence.This situation could change, of course, but, for now, the situation seems relatively benign.

Economists cannot entirely ignore the moves in financial markets. There are transmission mechanisms to the real world. For now, however, these transmission mechanisms are not especially alarming.

• The View From Asia is a weekly compilation of articles from The Straits Times' media partner, Asia News Network, a grouping of 22 newspapers. See www.asianews.network for more.