January 11, 2013 3:09 pm

Japan’s latest stimulus

A risky bet that does not address structural problems

If at first you don’t succeed. A tired saying; a tired response to Japan’s economic woes. Prime Minister Shinzo Abe has pledged a further Y10.3tn ($116bn) in fresh stimulus spending to try to boost economic growth in Japan by 2 percentage points. With gross debt already more than 220 per cent of gross domestic product, this is a risky bet. It is also a short-term effort that does not address Japan’s structural problems.

Tokyo has squeezed out Y60tn in funds for supplementary budgets since 1998. The latest splurge came in April 2009 with Y15tn in added spending. True, it pushed up the benchmark Topix by a third to 975 in the five months that followed. But poorly targeted spending, which focused more on jobs than returns (cutting down trees to keep the birds out of towns), failed to fend off recession. The Topix is back at 889 for the eighth time in the past five years. The 1,800 mark of the dotcom boom still a distant memory.

As for investors, they should know that Japan’s dependence on exports pegs equity returns to the yen’s dollar exchange rate. Hence as the yen weakened from 79 to the dollar in early November last year to 88 today, so the Topix has rallied by 23 per cent. Shares at big exporters such as Toyota are up 37 per cent over that time. And the yen may well weaken further – at least in the short term – because Mr Abe’s deal will be partly financed through the issue of Y5tn in government bonds. To keep yields under control, the Bank of Japan must then print yen to absorb the surge in supply.

Making calls any further out is more difficult. Previous economic boosts have not delivered a sustained improvement in Japan’s economy, but have merely postponed the inevitable. Every rally in equities since 1990 has fizzled out. Japan’s companies are woefully unprofitable and demand is shrinking with an ageing population. The stimulus does nothing to change all that.

Email the Lex team in confidence at lex@ft.com

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