Japan's Stimulus: Whatever it Takes to Restore Growth   

• Global stock markets in aggregate have rebounded some 25% from recent lows, with the S&P 500 tacking on 28% supported by a 63% surge in the financials as measured by the S&P Financials SPDR. This came as financial stocks rebounded from "priced for bankruptcy" levels, in addition to still sporadic but nevertheless encouraging evidence that the implosion in global trade and economic activity in various countries is beginning to bottom-out as evidenced by sequential (month-to-month) change rates.
• Global investors are very aware that Japan's economy has fared worse than other developed nations so far in the crisis, mainly on an implosion in global trade.
• The shocking shrinkage in Japan GDP in Q4 2008 and Q1 2009 prompted international agencies like the IMF, World Bank and OECD to slash their estimate of 2009 Japan GDP to 5%~6% declines.
• However, these estimates do not appear to fully reflect the impact of what is becoming substantial economic stimulus by the Japanese government. With the latest package proposal, the Aso Administration has committed to economic stimulus worth JPY27.4 trillion of fiscal expenditures and JPY132.4 trillion of headline stimulus, equal to over 3% of GDP in fiscal expenditures. 
• The three issues of this stimulus are, a) to renew Japan's economic viability and restore medium-term growth, b) avoid politicizing the stimulus as re-election pandering, and c) to restore consumer and business confidence. Even if the IMF's minus 6% GDP forecast is accurate and Japan's GDP still falls some 4% in 2009 even with the stimulus, annualized and year-on-year growth in the final months of 2009 could well turn positive.
• Consequently, we see the current rally as being more than a mere "dead cat" bounce, a knee-jerk reaction to the US rebound, or a "cup is half full" view of the global financial crisis; and more like an attempt to discount a bottoming-out and recovery in Japan’s recovery in the final months of 2009, aided and abetted by weakness in the yen driven by the rapid increase in government debt required to fund this stimulus.

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