What's going on?
Japanese stocks have been on big run over the past few days – they’re up more than 6% overall since Friday! Part of the reason is that investors are expecting the Japanese government to step up to the plate with some big new initiatives to try and boost the economy.
What does this mean?
Japan has been stuck in a slow growth environment for most of the past 25 years (yikes). And the global recession following the 2008 financial crisis only made things worse. For the past few years, Japan’s central bank has been instituting some extreme policies (like buying government bonds and making interest rates negative) in an effort to improve economic growth, but the policies have been pretty futile. Following a significant election win over the weekend, it’s expected that Japan’s Prime Minister will soon enact a large government spending program aimed at giving the economy a big boost. It’s quite possible such a program will be combined with further actions from the central bank, which together could be very good for Japanese stocks.
Why should I care?
For markets: Japan might be the first of many big countries to initiate a government spending program. Extreme measures like low (and sometimes negative) interest rates and government bond buying by central banks have struggled to sustainably boost growth in virtually all major economies – and people are starting to push for a plan B. There’s been an increasingly loud clamor for governments to directly spend more money (e.g. by building bridges) to give the economy a kick – and such actions would probably be good for stocks globally.
The bigger picture: Short-term prescriptions have to, eventually, give way to long-term solutions. Both extraordinary central bank policies and increased government spending are short-term in nature: their effectiveness wears off over time. It’s like constantly taking a painkiller for your sore neck instead of sorting out the problem with physio exercises. Eventually, solutions that address things like ageing populations (Japan), restrictive labor laws (Europe) and declining worker productivity (most places, including the US) must be implemented if economic growth is going to improve over the long-term.