The Business Times (Singapore), Saturday, January 6, 2001

Japan Is Back On Course, Wagers Economist Head of research outfit refutes recession forecasts

Japan is not slipping back into a recession. Analysts have got their forecasts wrong - and they are wrong again, according to Tokyo-based economist Richard Werner.

Not only is the Japanese economy, which has been moribund for a decade, finally back on its feet, its growth will pick up speed this year and Japan can again become the locomotive for the region's economic growth, he said yesterday at the ISEAS regional outlook forum.

Dr Werner's rosy projection came despite signs of a setback in the final quarter of last year, when Japanese corporate and consumer confidence ran low, leading analysts to virtually write off the country's economic recovery.

"Don't trust the consensus forecasts - they have been consistently wrong," said the chief economist and managing director of Profit Research Center, an independent research and advisory firm in Tokyo.

Why Japan has failed to rescue its economy for so long and despite many efforts, could be put down to a failure to understand why the economic bubble that led to the recession was formed in the first place, he said.

Most economists blamed low interest rates for the bubble. Yet there is no bubble today when interest rates are even lower, Dr Werner said. Economic theory says lower rates bring higher growth. The truth, he said, is they merely follow growth.

Japan's bubble was due to excess credit creation - and it is the lack of it that has caused Japan's recession, according to Werner. "Bad debts rendered banks risk averse and unwilling to lend. As credit creation fell, so did asset prices. Bankruptcies rose, boosting bad debts further. Shrinking credit creation suppressed economic growth in the 1990s."

The government has tried everything earlier but in vain to revive the economy - lower interest rates, fiscal stimulus, weakening the yen and deregulation, he noted. But one simple solution was overlooked - to get the central bank to print more money.

This happened only in 1998, boosting growth in 1999, and showing it worked, Dr Werner said. Bank credit is also bouncing back strongly though one would not know it from the official distorted figures, he said. "As overall credit creation has been rising sharply, we must expect a significant acceleration in real GDP (gross domestic product) growth in the coming year and thereafter."

What's more, the recession has brought deep structural changes, shifting the economy to a more open and market-based system and making it more productive, Dr Werner concluded.