ASIAWEEK 9 February, 2001

By Tim Healy


A contrarian sees an end to Japan's long slump

In recent weeks, the chronically ill Japanese economy seems to be flat-lining. GDP barely moved in the last quarter of 2000 after consecutive increases early in the year. A basket of leading indicators turned down. Banks are said to be almost as far from recovery as ever. All of which makes it surprising to hear an optimistic economist in Japan. But that describes Richard Werner, founder and chief strategist for an independent research firm in Tokyo called Profit Research Center. Werner says that a little-reported change in the way Japan is funding its huge budgetary stimulus packages is adding significantly to the nation's overall money supply, and that, he argues, portends well for the future. He spoke recently with Asiaweek's Tim Healy.

What do you see happening with Japanese money supply?

Two things are hidden by popular statistics. First, Japanese banks are writing off a large amount of bad debt. When they do that, their accountants come in and reduce the officially declared loan balance, but that makes the loan numbers look bad on a year-on-year comparison. Second, bank lending to the government is increasing rapidly, but that is not included in most of the numbers you see. If you just broke out bank lending to the central government, you find that it increased 447% in November 2000 from a year earlier. The net result of these two distortions is that total bank credit creation is now rising at around 6% rather than falling by 4%, which is what has been reported.

Why is the government borrowing so much from banks? Public spending hasn't gone up 447%.

In fact government spending has been declining and will decline more sharply over the next three years. We have had over a dozen fiscal stimulus packages in Japan since 1992, probably amounting to [more than a trillion dollars]. But they haven't had much impact. That's because most of the spending was funded by issuing bonds. Any investor who bought government bonds pulled the money from somewhere else. So the government took with one hand through issuing bonds and then gave back through fiscal spending. There was no increase in total money. Then in April 2000 for the first time in the post-war era the central government borrowed from banks to finance spending. The difference is that when banks lend that effectively creates money. That's credit creation.

Don't banks have a finite amount that they can lend?

Yes, but they're far, far below that [in Japan]. Banks have been burdened with bad debts, risk averse and unwilling to lend. But when the government wants to borrow it's a different matter. It's a zero-risk borrower. The banks are happy to lend.

How does an increase in bank credit help the Japanese consumer? Consumer sentiment remains down. How is that going to change?

There is actually a reasonably strong link between money creation and consumers. What determines consumer consumption? How much money you have to spend and how much you actually spend. Both are influenced by how your company is doing. If your employer is doing better, not only is your actual pay likely to go up but you get more optimistic.

What about the possibility that a recession in the U.S. will hit Japan hard? Money supply won't help that.

It would obviously have some impact but it won't be as big a negative as people fear. Think about it. Why has Japan been in a recession the last 10 years? Because foreign demand was weak? No, the problems are clearly at home. So, if you solve the problems at home then you're going to get a recovery no matter what the rest of the world does.