T

he world economy has been awash with liquidity since late 2007 when the global financial crisis began and provoked central banks all over the world to ease monetary policy. Despite promising signs of an economic recovery, central banks in developed economies show every sign of maintaining ultra-low interest rates and aggressive quantitative easing for some time to come.

So far, emerging Asian economies have enjoyed the benefits '€” global demand for their exports has been supported and inflows of funds from the developed world have advanced asset prices. Still, recent history reminds us just how dangerous easy money can be. Asia'€™s policy makers need to be alert to the risks.

The major economies will need at least two to three years more before they fully overcome the crisis. That means central banks in the US, Europe and Japan will keep pumping money into their economies for a few years more.

It takes a long time for any given economy to recover from a financial crisis. It is even more of an uphill struggle when the crisis is on a global scale and the crisis is the worst since the Great Depression of the 1930s. Sure enough,

Europe has stumbled from the global financial crisis into a sovereign debt crisis of its own and there is no sign of an early rebound there. In Japan, 20 years of deflation and lack of policy resolve have left it with structural problems of immense scale '€” one of the most rapidly ageing populations in the world, a public debt in relation to the size of its economy which is worse than Greece'€™s and an economy struggling to compete with the rising economic powers of the 21st century. Europe and Japan will need radical monetary support for years to come.

There are some signs of hope in the US, though. The housing market is finally beginning to grow. Credit is beginning to flow again to small and medium enterprises, which do most of the hiring in the economy, helping the labor market to find its feet as well.

Still, it is still too early to celebrate a full-fledged recovery in the US. Because its squabbling politicians were unable to compromise on resolving the country'€™s serious fiscal challenges, automatic spending cuts have kicked in, which will seriously slow economic growth.

Moreover, part of the recovery is built on weak foundations '€“ consumer spending has perked up but at the expense of weaker savings. The savings rate must rise and that will be a drag on the economy. That'€™s why the Federal Reserve Bank has made it clear that there will be no early exit from its extraordinarily loose monetary policy.

We are now coming to a point where the costs and risks of ultra-easy money could outweigh the benefits for Asian economies.

The export-oriented economies of Asia did not complain when radical monetary measures took the sting out of the global economic recession which unfolded in 2009 following the collapse of Lehmann Brothers and other institutions in late 2008. Export demand and commodity prices held up supporting Asian economies. However, we are now beginning to see the downsides to this easy money begin to hurt.

First, Japan'€™s decision to throw caution to the winds and radically expand monetary stimulus is raising the risks of a currency war. China, among others, has warned Japan against pursuing a sharp weakening of the Yen which would hurt China'€™s export competitiveness. But Japan appears to set on a course of easier money and a weaker Yen.

If China and other of Japan'€™s competitors such as Korea also act to weaken their currencies, the other Asian countries would feel obliged to follow suit precipitating a race to the bottom which could hurt everyone.

Second, depressed interest rates in major economies have helped to reduce interest rates in emerging Asia as well, even though the more vibrant economies in this part of the world require higher interest rates to keep the economies on an even keel. Money has flooded into emerging Asian equities, bonds and real estate markets, inflating prices and depressing yields.

Not surprisingly, speculative bubbles are forming. Moreover, too-low interest rates are encouraging individuals and companies to take on more debt and more risk than is wise, assuming wrongly that low interest rates will last for the terms of their loans, a dangerously complacent assumption. In the past year, we have seen household debt in countries as diverse as Korea, Malaysia and Thailand rise sharply.

Third, there are signs that this easy money is causing Asian economies to overheat. Aside from soaring real estate prices in most countries, we are also seeing the external balances of Asian economies deteriorate sharply. This is particularly the case in India and Indonesia.

It is time for Asia'€™s central banks and other policy makers to get serious. First, they have to stand up to their political bosses who want low interest rates to fuel growth: they have to raise rates where needed, even if the politicians and the public complain. Second, they must recognise that the conventional monetary policies alone will not suffice: in a world of ultra-low interest rates, a country raising rates will see huge capital inflows that would negate the effect of tighter policies.

There is only one way out '€“ some forms of restrictions on capital flows must be put in place. These could be taxes on capital inflows or restrictions on asset markets such as raising stamp duties and tightening rules on loans for purchase of assets such as real estate.

In the 1990s, they allowed hot money flows to destabilize their economies which made them vulnerable and contributed to the Asian financial crisis of 1997. They must not make the same mistake this time.

The writer is vice chairman of the Indonesian Chamber of Commerce and Industry (Kadin Indonesia) and president director of PT Gobel International.