Those of us looking for a quick fix to economic difficulties should take a look at Japan and shudder, writes Sheila O'Flanagan.

In all of my bond-dealing days there was never an occasion when an auction of Japanese government bonds didn't manage to attract enough bidders. And yet that's what happened last week when investors shunned the latest auction. The governor of the Bank of Japan, Mr Masaru Hayami, denied that he was worried but he should be. Traders declining to bid for bonds are making a statement - and that statement is a lack of confidence in the policies of the financial authorities.

Perhaps the reason for the failure of the bond auction can be found in Mr Hayami's announcement a couple of days earlier that the Japanese central bank would buy shares directly from commercial banks. This is not a good idea. In fact it's a terrible idea. It's the kind of idea that reminds me of digging a deep hole and then, just for the heck of it, jumping in and digging it even deeper.

According to Mr Hayami, the bank is digging this hole as a measure to help banks reduce risks from their balance sheets. The central bank wants to help the commercial banks dispose of some of their massive holdings of equities because it fears that the large portfolios that the banks have are destabilising the banking system.

Unfortunately there is a tradition in Japan of the banks taking huge equity stakes in their client companies. It might have seemed like a good idea originally (though it shouldn't have) but those large holdings have been a nightmare for quite some time.

After all, the Nikkei is currently toying with a 19-year low and it doesn't look like recovering any time soon (so all those analysts who blithely say that US and European equities can come out of the trough quickly should have a think about something like a 19-year low).

Part of the problem, of course, is the complex structures of cross-holdings, which are endemic in the Japanese system - as well as the bank holding a stake in a corporate company (or its entire loan portfolio of corporate companies), the companies can also hold a stake in the bank - a sure-fire recipe for the disaster that happened and is continuing to happen.

The market was taken by surprise by the announcement because the Bank of Japan had previously resisted calls for it to intervene in the stock market and bail out the banks. It had to ask the government's permission for the share-buying exercise and the government was quick to give its blessing.

The whole manoeuvre makes a lot of people wonder how concerned the Bank of Japan actually is about the banking system because there's no doubt that this is a drastic step.

Yet if the Bank of Japan is that concerned, buying bombed-out shares isn't going to make matters any better. Instead of the banks holding the poisoned chalice it's being passed to the regulator. And they think that's a good idea?

Everyone agrees that the banking system needs to be sorted out. The banks' money is tied up in hopeless cases, which thwarts their attempts to lend for new ventures. But by stepping in to buy equities now the central bank runs the risk of being seen as the buyer of last resort and a feeling that if equities fall to certain levels it will step in again and again to support the market. This kind of thinking always ends badly. It provides a short-term solution and allows tackling the real issues to be put off for that little bit longer.

Sooner or later the Japanese government is going to have to face the fact that the banks have massive bad debts, which will have to be written off. Some banks will undoubtedly fail - their client companies already have. But putting off the difficult choices only makes them hurt even more when they have to be faced.

Another worrying aspect to the bond market's reaction is that the value of the government bonds that the banks already hold was knocked sharply back by the failure of the auction - reflecting what had already happened in equities. I have a sinking feeling that this is a lose-lose situation for the Japanese authorities and that the assets of the banks will end up even lower by the time this is finished - exactly the opposite of what I presume the central bank wants.

The Japanese aren't alone in their misery as world markets continue to bring nothing but unpleasant news to shareholders and analysts alike.

This quarter's earnings figures have started to be touted around and none of them make very inspiring reading with Chase, Oracle and McDonald's scaring everyone. The hamburger joint says it will miss earnings estimates by a couple of cents and reduce new store openings.

It's bad when people stop buying Big Macs. (Well, depending on your point of view!) Not to mention JP Morgan. If you really want to be worried, consider that their trading income for the second quarter was $1 billion. And for July and August it was a mere $100 million.

That's scary. Oh, and Charles Schwab is laying off 10 per cent of its workforce because nobody is trading.

We are still very much in the "it'll get worse before it gets better phase", one that I guess the Japanese had hoped would only last a few years for them but that has developed into the horrible mess they have now.

What nobody in the US or Europe wants is the kind of consumer shutdown that has happened in Japan, where people simply aren't spending money no matter how cheap credit has become. It hasn't happened yet. But it could.

Despite the Indian summer the days are getting shorter again. It's still a long run through the winter.