July 21 (Bloomberg) -- Rarely do comments by a central banker cause one to spit out coffee. Bank of Japan Governor Toshihiko Fukui seems to have succeeded.

Fukui, who's charged with ending deflation, last week said: ``I don't 100 percent trust (imported) economic theories.'' It was during a speech in which he argued for new economic theories tailored to Japanese society, and it's the talk of Tokyo.

The comments were disturbing for two reasons. First, what does Fukui think Japan has been doing these past 20 years? Far from importing international ideas, the world's second-biggest economy ran away from them. All the while its problems have grown larger and so have the costs of fixing them.

Second, Fukui offered his thoughts at a conference meant to educate people on monetary economics. At such an event, it would be nice if Japan's monetary guru offered a more accurate appraisal of his nation's policies.

After all, there's nothing ``imported'' about the zero- interest-rate policies of the BOJ. The group he singled out, ``the economic society of American people,'' has no hand in the unabashed socialism Tokyo practices. And there's little international about Japan's banking system or markets.

Japan Apologist

That's especially true of bonds. Generally accepted laws of supply and demand suggest Japanese bond yields should be higher than those of peers with better credit ratings. Not so. Ten-year yields in Japan are under 1 percent, while the U.S., which carries top credit ratings, pays investors 3.95 percent.

Most troubling about Fukui's views is that they fit with Tokyo's muddle-through strategy. Fukui has been viewed as Japan's great hope, an independent thinker who might shake up the nation's tired economic model. His latest comments make him sound like just another Japan apologist.

``It would make (people) confused in the end if you were to try to explain the Japanese economy in the framework of the imported economics,'' Fukui said.

Japan needs to adhere more, not less, to international economic standards. Tokyo has never been willing to let bloated, unprofitable companies fail, or allow bank executives to cut off even the dodgiest borrowers. Nor has it let competition or entrepreneurship thrive.

Different Snow

By resorting to the ``Japan is different'' argument, Fukui also ``seems to be building barriers to imports of foreign economic ideas,'' says Richard Jerram, chief economist at ING Securities (Japan) Ltd.

Japan's policy makers seem to have their own definitions. Economic boom? In Japan, that means 10 years of growth in excess of 0.1 percent. Floating currency? One that falls and makes the economy more competitive. Capitalism? In Tokyo, it means having markets that rise, and only rise.

Jerram calls it the ``snow, intestines and economics argument.'' The reference is to a couple of the more surreal Japanese trade disputes during the 1980s. One was over snow, the other beef.

Tokyo mulled slapping barriers on imports of foreign skis, claiming Japan's snow was different. Its restrictions on foreign beef imports were based on the contention that Japanese intestines were different. Now Fukui is making a similar point about Japan's economics: it's different, so foreign ideas are no help.

Not Alone

Just one problem with all this: Economics isn't geographically specific. The Austrian school doesn't only discuss the economics of a small economy in central Europe.

The bigger problem is that Fukui appears to be admitting he has no rebuttal to claims the BOJ can only fight deflation by trying something new. It suggests the BOJ's leader since March won't forge a path all that different from his predecessor, Masaru Hayami.

It also raises questions about the 11 percent rally in the Nikkei 225 Stock Average this year. If the man charged with ending deflation is already resorting to excuses for Japan's plight, equity investors have little reason for optimism.

When Japan alone was experiencing deflation, it's our- situation-is-different argument passed the laugh test. Now that prices are falling in China, Hong Kong and, potentially, even bigger economies, Japan is hardly a unique case.

Stubbornness

If Japan's economics is different, it's in the area of stubbornness. ``No modern economy has ever tolerated persistent deflation for so long,'' Jerram says. ``Japan isn't different because standard economic theories don't apply -- it's different because they haven't been applied.''

Some investors don't seem to care, however. The Nikkei has rallied this year, even though banks are still swimming in bad loans and the economy is depending on a U.S. recovery to avoid recession.

Deflation or no, yields are too low to compensate investors for the risk of owning government debt. Even so, yields have come off recent highs. Volatility in stocks reminded investors they lack viable alternatives to bonds. The market isn't panicking and Japan's bond bubble isn't bursting just yet.

Oh, but remember, Japan is unique. So maybe there's no need to worry about any of this.

Last Updated: July 20, 2003 23:11 EDT