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As Japan pulls out of a deep economic slump, it is time to ask who created the mess. But as with the war guilt question, don’t expect an easy answer. Japan does not like to pin blame when its elite is involved. The guilty remain in place; the chances of another disaster remain intact.

One obvious answer, or course, is the collective euphoria that created the bubble economy of the late 1980s. As someone involved in the economic debate at the time, I recall only three commentators who warned of the dangers, and only one of them — Professor Yukio Noguchi, then of Hitotsubashi University — has gained much recognition since.

In the NHK round tables and other economic guru talkfests at the time, the conventional wisdom was that, as Japan was a small country, land prices would spiral for ever and the best that could be hoped for was a damper on speculative buying. By corollary, it was assumed the stockmarket boom would also continue forever.

When the bubble did collapse hardly anyone apart from the Keynesian economist and current finance minister, Kiichi Miyazawa, realized the need for public funds to rescue banks from their bad-loan burden. Most seemed to think the collapse was temporary and that bubble days would soon return.

True, there was an upturn in 1996 as consumers and investors resumed the spending they had delayed during the slump, and the government expanded public-works spending. Nurtured carefully, it is just possible the recovery could have lifted land and share prices to a level where some of the bad-loan problems would disappear.

But at this point the anti-Keynesians sprung into action. Inspired by the Reaganite/Thatcherite reforms in the U.S. and British economies during the 1980s, they demanded, and got, the 1997 commitments to public-works cutbacks and free-competition policies, allowing weak financial institutions to go bankrupt.

That was the equivalent of throwing a pneumonia patient into the snow to get fit. The loan problem began to attack the heart and lungs of the economy.

The economy needed reform, but this should have come only after it had been nursed back to health. Few seemed to realize that the U.S. and British economies had only managed to recover from the deflationary effect of their reforms through currency depreciation which, as in much of Asia today, provided stimulus by protecting domestic industries — the exact opposite of the reformist goal of subjecting U.S. and British industries to global competition.

The Japanese economy, on the other hand, had to suffer the double punch of rapid currency appreciation. It needed all the help it could get.

But as during the bubble economy, the number of commentators who got it right this time — who realized the need for drastic reflationary policies, including expanded public works — could be counted on the fingers of one yakuza hand. One of the more prominent was Richard Koo of Nomura Securities, who I remember trying vainly to convince a small committee of alleged economic experts who were giving advice directly to the Cabinet Office.

Another group I used to attend at the time — the Amagi Conference of opinion leaders that IBM sponsors annually — was equally skeptical.

One reason for the skepticism was a well-founded dislike of the corruption and waste that surrounds public-works projects in Japan. But the main reason was more ideological — the strong shift to the right that we see today in both foreign and domestic policies.

Commentators in Japan’s main economic newspaper, Nihon Keizai Shimbun, poured scorn on both expanded public-works spending and Keynseian economic doctrines as hangovers of outdated leftwing thinking. Ironically, the one leading newspaper that got it right at the time was the Yomiuri, not noted for any leftwing tendency, with its call for policies of controlled inflation — a call instantly dismissed by the conservatives at the Bank of Japan.

True, with the formation of Prime Minister Keizo Obuchi’s Cabinet, and thereby Miyazawa’s re-emergence, the need for expanded spending and massive fund injection for bank rescues has now been realized. Even the Nihon Keizai shows signs of an about-face, as it publicizes examples where public spending on urban transport links is quickly repaid through easing of congestion.

But the current media eagerness to punish and pillory the recent heads of collapsed financial institutions for balance-sheet window-dressing makes one wonder whether Japan really understands what was happening to its economy.

Behind the alleged sin of these people was a practice called “tobashi” — hiding bad loans and collapsed share prices in accounts off the published balance sheet. And technically that is a crime, even if it was condoned by the Finance Ministry at the time.

But do the critics realize what would have happened if the law had been obeyed? As those institutions went bankrupt they would have dumped land and shares on an already collapsed market, forcing more institutions into bankruptcy.

The economy would have entered a black hole, bringing down much of the Asian and even world economy with it. The bankers and ministry officials who tried to prevent this disaster deserve praise, not loathing, even if their motives were not the purest.

Ultimately the critics have the same herd mentality that created the bubble economy. Once the conventional wisdom sets in a direction, any direction, common sense easily goes out the window.

As a result a once solid economy has been tested very much to its limits.

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