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Controversial Report Gives Gloomy Forecast for Japanese Economy

By Sonni Efron
Los Angeles Times

Even as officials here prepare to offer details Friday of their $124 billion plan to jolt this nation out of its economic doldrums, a controversial new report argues that unless Japan takes drastic action quickly, it is headed for a long period of deflation and decline.

"We conclude that the long-term prospects for growth are poor," says the report by David Asher, an Oxford University Japan scholar, and Andrew Smithers, chairman of Smithers & Co., an economic consultant in London. "A large portion of Japan's considerable wealth and economic potential stands to be frittered away by misguided economic policies in the coming decades just as in the 1990s."

Bulls argue that Japan has turned a corner. But Asher and Smithers calculate that Japan's true public sector debt in 1997 probably exceeded 150 percent of gross domestic product - about 50 percent worse than standard estimates - and that corporate debts are up to triple U.S. levels. The pension system is grossly underfunded and an aging population means the worst is yet to come, they say.

"Even with the highest savings rate in the world, even with the highest level of foreign currency reserves in the world, it's still unsustainable," Asher said in a telephone interview from London. "The only question now is what to do when the hard landing occurs."

The report arrives at a time of unprecedented global fear about the future of the world's No. 2 economy. After six months of hand-wringing and incremental measures that have failed to reassure the bearish markets or the anxious Japanese public, the ruling Liberal Democratic Party is expected Friday to release details of the record package that the government hopes will blast the economy out of recession by summer.

The United States worries that a prolonged slump in Japan, with an economy 6.5 times the size of China's, could stunt growth in Asia and dent the U.S. economy. Already, an anemic Japan is shunning imports from Southeast Asian nations and shipping America more and cheaper exports. Japan's imports from Asia fell 18 percent in February, while the U.S.-Japan trade imbalance surged 21 percent that month - a trend with potentially nasty political consequences.

A spin counteroffensive is under way. On Tuesday, the Foreign Ministry released a 52-page report defending Japan against charges by the U.S. government and others that it is doing too little to bring about an Asian recovery. Reminiscent of glossy publications issued to counter the "Japan-bashing" of a decade ago, the report seeks to debunk "misperceptions" about the Asian economic crisis.

It argues that Japan in no way contributed to the crisis and has handed out $37 billion in aid - more than any other nation - since the turmoil began last year. Reviving one of Japan's favorite "talking points" from the 1980s, the report notes that Japan imports more goods per capita from the United States than America imports from Japan. (Of course, mercantile Japan also exports more goods per capita than the United States.)

On Wednesday, Eisuke Sakakibara, the Finance Ministry's vice-minister for international affairs, announced that the battered economy has hit bottom. Sakakibara, asserted that the U.S. stock market is "now approaching its peak" and "Japan is the only country where there is no bubble."

"Japan is now a buy," he said.