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Central Banks on the Offensive?

FRANKFURT – It looks like a coordinated offensive: on September 6, the European Central Bank outlined a new bond-buying program, letting markets know that there were no pre-set limits to its purchases. On September 13, the United States Federal Reserve announced that in the coming months it would purchase some $85 billion of long-term securities per month, with the aim of putting downward pressure on long-term interest rates and supporting growth. Finally, on September 19, the Bank of Japan declared that it was adding another ¥10 trillion ($128 billion) to its government securities purchase program, and that it expected its total holdings of such paper to reach about $1 trillion by end-2013.

There is, indeed, room for such concerted action, as the outlook for all three economies has deteriorated significantly. In the eurozone, GDP will certainly decline in 2012, and forecasts for next year are mediocre at best. In the US, output continues to expand, but at a moderate 2% pace; and, even leaving aside the fiscal cliff looming at the end of the year, when Congress will be forced to impose spending cuts and allow tax cuts enacted in 2001 to expire, recovery remains at risk. In Japan, the global slowdown and a stronger yen are hitting the export sector, growth is flagging, and inflation is close to zero again.