US and Japanese central bankers are in denial over the signs of an impending meltdown

The final day of the summer marked the start of yet another season of futile policymaking by the US Federal Reserve and the Bank of Japan. The Fed did nothing, which is precisely the problem. And the alchemists at the BOJ unveiled yet another feeble unconventional policy gambit.

Both are pursuing strategies woefully disconnected from their economies. Their latest actions reinforce a commitment to an insidious transmission mechanism between monetary policy, financial markets and asset-dependent economies. This approach led to the meltdown of 2008, and it could well sow the seeds of another crisis.

Lost in the debate over the efficacy of their new tools is the reality of anaemic growth. Japan has been stuck in essentially a 1 per cent growth trajectory for 25 years, failing to respond to repeated efforts at extraordinary monetary stimulus, while subpar US recovery has been largely unresponsive to the Fed’s unconventional stimulus.

Bank of Japan policy shift signals bond purchase scheme close to limit, say analysts

However, central bankers remain steadfast that their approach is working, by delivering what they call “mandate-compliant” outcomes. The Fed points to the sharp reduction of the US unemployment rate as proof of nearing one of the targets of its so-called dual mandate. But when seemingly solid jobs growth is juxtaposed against weak output, the story unravels, revealing a major productivity slowdown.

The Fed has again kicked the can down the road on interest rates

While policy traction has been notably absent in the real economies of both nations, asset markets are a different story. Equities and bonds have soared on monetary policies that have led to rock-bottom interest rates and huge liquidity injections.