Is the Sun Finally Rising on Japan? – Honda Motor Co Ltd (ADR) (HMC), Toyota Motor Corporation (ADR) (TM)

Borrowing a page from the U.S.
At the same time, Japan has attempted to boost its economy with a large stimulus plan similar to what China and the U.S. have put in place. Prime Minister Shinzo Abe fulfilled a campaign promise by getting a $117 billion stimulus package passed, with an emphasis on disaster recovery and other public works projects, as well as small-business financing and greater defense spending. Abe hopes that the stimulus will lead to a rise in GDP of 2 percentage points and create about 600,000 new jobs.

The problem, though, is that the government has pursued similar policies at various times during the two decades in which Japan has endured its slow economy. As the U.S. has discovered, one-time stimulus measures have one-time economic effects, but in order to sustain the growth that those measures produce, a government has to go back to the well repeatedly. That risks creating the very moral hazard that governments try to avoid.

The stock market impact
The combination of a falling yen and better prospects for exporters has led to huge enthusiasm for Japanese stocks. It’s important to remember, though, that after such a big drop in the yen, the return for U.S. investors has been far lower in dollar terms, as investors in the dollar-denominated iShares MSCI Japan have made a smaller jump of 18% since mid-October, well below the 30% gain in yen terms. The prospect for further devaluation has actually led to the rise of currency-hedged stock funds, which use currency strategies to try to track local-index moves without adjusting for changing foreign exchange rates.

Even after the big increase, perspective on Japan’s longer-term woes is important. With the economy still facing huge amounts of government debt, an aging population, and increased competition from China and elsewhere in its region, Japan is far from having solved its economic woes just yet. That makes the Japanese market far from a sure thing right now.

The article Is the Sun Finally Rising on Japan? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

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