Investment Contrarians

Why You Shouldn’t Believe Japan’s New Stimulus Will Work

By for Investment Contrarians |

Japan’s New Stimulus Will WorkJapan, under newly elected Prime Minister Shinzo Abe, will aggressively try to get the country’s economy back on track after more than two decades of economic stalling, but it will not be easy. Armed with a new stimulus spending of $116 billion, the hope is that the stimulus spending will drive consumer spending and help revitalize an economy that has been in a comatose state. (Source: “Japanese government approves $116bn stimulus package,” BBC News, January 11, 2013.)

Abe is looking to add significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to drive Japan’s gross domestic product (GDP) growth to spur its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012, last accessed January 14, 2013.) But it will not be easy, as the past decades have shown.

Japan entered a technical recession in the third quarter of 2012, with its GDP growth contracting 0.9% and continuing to be impacted by decades of stagnant growth. In fact, from 1980 to 2010, Japan’s average GDP growth was a minuscule 0.6%.

The new stimulus sounds great, but there’s a problem, as the country’s debt levels represent some of the highest in the world and make the U.S. situation seem like a cakewalk.

Japan’s debt as a percentage of its GDP was a humongous 208% in 2011—the worst in the world, according to the International Monetary Fund. Greece, with its financial crisis, is comparatively better at 161%, and the U.S., with its crippling debt levels, is relatively strong at 103% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia via The World Factbook, United States Central Intelligence Agency, last accessed January 14, 2013.)

The problem is that the newly elected Liberal Democratic Party appears to want to spend the country into a financial abyss in order to pump up the country’s GDP growth.

Japan continues to be in an economic abyss, void of any GDP growth.

The expected use of expansive fiscal and monetary policy in Japan to try to re-ignite what used to be the “Pearl of the Orient,” so far, has probably helped to prevent a deeper recession, rather than driving GDP growth.

The country’s interest rates are already at zero, so there’s little space to maneuver. Given interest rates have been at zero percent since 2010, the failure of the country’s GDP growth to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen [JPY]?,” GoCurrency, October 22, 2102, last accessed January 14, 2013.) That’s seven years with extremely low interest rates, and not much has improved with the country and its GDP growth.

The Markit/JMMA Japan Manufacturing Purchasing Managers’ Index (PMI) came in at a dismal 44-month low of 45.0 in December. It was the seventh straight month of contraction.

If I were a betting man, I would not bet my money on a turnaround coming soon for Japan.

Japan is blaming the stagnant GDP growth on the stalling in Europe, the high level of the yen, and its impact on exports. The higher value of the yen does make it tough for Japanese exporters, and it is preventing an export-led recovery for the Japanese economy.

And just like the U.S., Japan’s GDP growth is driven by domestic private consumption that accounts for about 60% of the economy, versus about two-thirds for the U.S.

The problem is that consumer spending is down, as the country’s unemployment rate hovers over four percent. In 1980 and 1990, a mere two percent were unemployed, according to GoCurrency.

I’m not optimistic when a turnaround will occur, but the idea of adding massive debt to an already mounting pile of debt is worrisome.

My advice: stick with China, South Korea, Malaysia, and Singapore.

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