Follow the money: part 2

15 months ago, I explained why the Japanese economy wasn't worth getting excited about.

For the same reasons, it still isn't.

However, given Japan's recent upturn, it may be tempting to at least start getting excited.

This week, The Economist succumbed to just that temptation.

Just like the magazine, I didn't buy it.

Did you?

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One key piece of economic data that I look to for any sign of confidence in an economy is its money supply (the first column on the left shows the growth rate tending lower in 2005).

This represents the blood flowing through the veins.

If it doesn't circulate well, there's something wrong.

Judging by Japan's money supply, there's still something wrong with their economy.


Really?

It's only when Japanese individuals and companies are ready to use money, intead of putting it away for a rainy day, that brighter days will come.

Unfortunately, this is a self-fulfilling prophecy: the less confidence Japanese have in their economy, the worse it will continue to perform.

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The recent strategy of Japan's central bank has been much like its over-prescribing doctors: pumping the patient (economy) with excessive amounts of drugs (liquidity).

While Japan has been drugged up with money, China has raced ahead and now poses a greater threat than ever.

Japanese firms are right to be cautious about investing their money. Only when that money gets put to use will Japan be ready to take on China, Korea and the rest of the world.

Until then, the light at the end of the tunnel will remain the headlights of China and others heading straight for it.