Inflation dipped in the UK in May, falling from 3.7 to 3.4 per cent. Markets celebrated because the official figures were a full 0.1 per cent better than expected. Yes, that’s right, markets had anticipated an inflation rate of 3.5 per cent, tut tut.

It does seem to us that quantitative easing (QE) is not working. Contrary to popular opinion, we don’t think it will lead to inflation, but it may lead to the inflation of asset prices and a bubble in Treasury bonds.

The snag is, QE is not dealing with the underlying problem.

Which is why the latest development in Japan seems interesting.

Many years ago the Japanese authorities discovered that once interest rates were down to zero, there was not much left you could do to boost the economy.

 But now, Japan’s central bank  it has come up with a new idea, and has revealed plans to pump in $33bn of new money to be used as loans for companies. The bank said: “The most critical challenge the Japanese economy is currently facing is to raise the potential economic growth rate and productivity.” Today’s measure “aims to act as a catalyst for financial institutions in making efforts toward strengthening the foundations of economic growth.”

One of the problems in Japan is that policy makers have always been behind the curve, introducing one scheme after another, but nearly always too late. In the West, central bankers were determined to avoid the same mistakes, which was why they cut rates so quickly. Even so, they may have left it too late.

The truth is that just as Japan needs higher productivity, so too does the UK. And UK businesses, especially the entrepreneurial types, need access to funding. Money creation does not lead to inflation if it is matched by greater production. The Bank of England wasted too much time throwing money at government bonds. Instead, the way to kick-start the UK economy is by investing in business, something that banks are either unwilling or unable to do. The sooner she takes a leaf out of the Bank of Japan’s new book, the better.

Today’s articles:
BP – the bill rises and rises
RICS points to rising supply
Japan – central bank finds the plan that UK needs
Greece and Spain see more angst
World Cup to boost economy