Stephen Pope Comments: Stimulus Spending, Japanese Style – Smart Money Online

Smart Money Online, December 8, 2009

Stocks in Asia closed lower today: U.S. futures are pointing to a mixed open.

Stimulus programs are winding down in many countries, but Japan’s efforts to jolt its flagging economy are getting another booster shot. The government in Tokyo passed a 7.2 trillion yen plan ($81 billion) today, equal to about 1.6% of gross domestic wwwuct, in an effort to stave off deflation and lift chronically weak domestic demand.

Technically, Japan isn’t in recession, having pulled out in the April-June quarter. But third quarter figures, due out tomorrow, are expected to show that growth was slower than previously expected, raising fears of another slowdown. Japan’s prime minister, Yukio Hatoyama, said as much last week, arguing that additional “measures are required so that the economy will not fall into a double-dip recession.”

And Japan is no stranger to prolonged slowdowns. This is the country, after all, famous for its “lost decade” in the 1990s—a period where consumers lost confidence in the economy, hoarded savings and government programs failed to deal with a property bubble and “zombie” banks (sound familiar?). Indeed, the aftershocks of those years are still being felt in Japan, where the savings rate is high, consumer demand is weak and deflation remains a perpetual threat. The soaring yen—recently at 14-year highs–hasn’t helped matters either, making Japan’s exports more expensive and putting pressure on consumers to lift the economy.

The latest package is designed to spur spending on household appliances, “green” cars and new homes, aided by low-interest mortgages. But some analysts see it as nibbling around the edges. “It has a feeling of a tad too little and well past time,” says Stephen Pope, chief global strategist with Cantor Fitzgerald in London. Adding 7.2 trillion yen to a 450 trillion yen economy probably won’t have any significant impact or “halt the drift” into deflation, he says. Government bond sales this fiscal year will exceed tax revenue for the first time in post-war history. And Japan is heading toward a level of government debt equal to 200% GDP in 2010—hardly inspiring confidence that Tokyo is managing the crisis well.

If you’re going to invest in Japan, suggests Pope, look for companies that can make strong sales to faster growing Asian economies and “actually generate some yield.” As for Japanese stocks overall, the Nikkei snapped a six-session winning streak today as exporters fell on strength in the yen.