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Crunching numbers
graphic November 27, 2001: 10:11 a.m. ET

In Japan and U.S., accurate numbers are becoming a question.
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NEW YORK (CNNmoney) - If you are going to recover from a mistake, it helps to know exactly what it is you did wrong and how much it is going to take to fix it. Husbands will tell you that is sometimes hard to do. So will central bankers ... at least in Japan and the United States.

There's been a lot of debate lately about whether or not Japan and the United States are in the same boat. There are similarities. Both have had stock market "bubbles" pop. And both have had over-investment and over-capacity in key industries that subsequently led to dramatic reversals of economic fortune. Likewise, there have been dramatic interest rate cuts by the respective central banks.

But there are important differences. Japan's stock bubble was fed by real estate speculation (people couldn't buy land, so they bought companies that owned land). Japan's bank regulation is more hands-off. And Japan's rate cutting has taken a decade, whereas the U.S. rate cuts have come in 11 months.

Do the similarities outweigh the differences? Hard to tell.

But there is a worrying feature in the Japan situation that is beginning to surface in the U.S. situation, albeit in a different form: Confusion about how much money is or was badly invested.

In Japan that's a huge problem. The banks there won't come clean about how much in bad loans they are carrying on their books and exactly who owes it to them. Why? Well,  banks are shareholders in many of the companies they loaned money to. Making the bad loan situation public hurts the company and the shareholder. Get it?

Also, it is likely to be a huge overall number. In a recent report Goldman Sachs suggested it could be as high as $1.9 trillion, half the nation's GDP. An official number like that could start a run on the banks. Then they'd go down for sure.

Why doesn't the Japanese government forcefully step in? Corrective action means layoffs, which are never popular with voters. And many of the delinquent borrowers are state-run corporations, also an election-sensitive issue. And a bank bailout may be more than the government can afford, at least under existing spending policies.

You get the Japanese government's predicament.

But all the experts agree - Japan won't be able to move forward on an economic recovery until it gets a handle on the problem loans. And the first step is figuring how many of them there are and how much they add up to.

Pro forma, no forma

The same sort of numbers-fuzziness is creeping in on this side of the Pacific. It's coming in corporate earnings reports.

Earnings reports are never easy to understand to begin with. But as companies come under more and more pressure to perform, they are getting more and more loose about what counts toward the bottom line result and what doesn't.

Pro forma results - which started out as a way of figuring out earnings for companies in the process of a merger - have become the preferred method of reporting for some leading outfits. Under the guise of pro forma, many items that would be considered operating items can be left out, thereby inflating bottom line results.

Then there are companies that would rather you look at operating earnings or earnings-before-interest-taxes-and-amortization, because those are better numbers, and so adjust their reports accordingly.

"The problem is that instead of having one way to calculate corporate earnings that everybody understands, we have two or three methods." David Blitzer, Standard & Poor's managing director and chief investment strategist, told our sister television network, CNNfn, earlier this month  when his rating agency suggested the imposition of a uniform reporting system. "And the one that most people use, there is virtually no agreement at all about what it means."

Apparently past numbers aren't all that sound in some cases either. Some companies - particularly those with sudden problems - are finding that they have to go back and restate earnings. Enron, Xerox and Conagra are some examples.

So should we worry about this creeping confusion about numbers? Probably not, says one well-known economist.

"The situations have different issues. Here we're seeing a bending and stretching of the rules. Over there the rules are totally crushed," said Bob Brusca, chief economist at Ecobest. "...We have an accounting standards board and a fairly strict set of standards. Yes, we're seeing some problems. But by comparison they are nothing like the problems in Japan."

Still, investment is the natural-selection mechanism for an economy. Healthy businesses get investment. Weak ones don't.

But investment relies on accurate numbers. Sure, we're only seeing a fringe problem here, but we should probably do something before it becomes a larger, languishing problem.

Just ask Japan. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

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