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Editorial: Solution to global economic slowdown goes deeper than monetary easing

As a slowdown in economies is seen across the world, central banks have started returning to monetary easing.

This month the European Central Bank (ECB) decided to delay an interest rate hike for the eurozone originally planned for this year until next year or later. It also decided to resume long-term low-interest loans to banks as a stimulus measure. After the ECB ended its quantitative easing at the end of 2018, it was expected that the central bank would enter a phase of increasing interest rates from this autumn or later.

Ahead of the ECB's latest move, the Federal Reserve Board of the United States also decided not to raise interest rates for the time being.

In Asia, meanwhile, India's central bank last month lowered interest rates for the first time in a year and a half. There is speculation that the next move of central banks that have not yet altered their policies will not be to raise interest rates, but to lower them.

Such moves are occurring because growth forecasts for the world economy are being revised downward. The root causes of this are the trade war between the United States and China, and political and diplomatic issues such as Brexit.

It is evident then, that if politicians could solve these problems, they would be able to sweep away many of the dark clouds hanging over the world economy. It is absurd that expectations are instead being placed on monetary easing by central banks, and that some have already moved in this direction.

It has been pointed out that extended periods of ultralow interest rates can have adverse effects. One of these is an increase in global debt. According to the Organisation for Economic Co-operation and Development (OECD), global outstanding debt in the form of corporate bonds issued by non-financial companies stood at almost 13 trillion U.S. dollars at the end of 2018 -- more than double the amount outstanding in real terms before the 2008 global financial crisis. If investor sentiment turns around and a full-scale increase in interest rates resumes, then there is a risk that many companies will find it impossible to service and pay back this debt.

Furthermore, if interest rates are lowered in the interim before being properly normalized, then it will limit the policy options available in the event of a full-fledged economic downturn.

The Bank of Japan (BOJ) is already deadlocked. While it admits a slowdown in the world economy, it regards this as a short-term phenomenon stemming from Europe and China, and has thus decided to leave in place its view that the domestic economy is gently expanding. But as the BOJ strives to take an optimistic stance, it is obvious that, with virtually no room left for additional stimulus measures, it is in a tough spot. Central banks overseas should learn from the BOJ's conundrum.

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