Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
Is This the Debt Bubbles Last Rattle? - 12th Feb 16
Gold Stocks Upside Targets - 12th Feb 16
Stock Market Observations - 12th Feb 16
Will Capital Controls Return? - 12th Feb 16
Gold, Gold Stocks, and the End Game - 12th Feb 16
Canadian Dollar Now Even Less of a Haven from US Dollar Collapse Than Before - 12th Feb 16
The Stock Market Dow Elevator; 18, 17, 16.... - 12th Feb 16
Will Harry Dent Eat Crow on His $700 Gold Price Prediction? - 12th Feb 16
Where to Hide Your Money From Reckless Governments - 12th Feb 16
The War on Cash is About to Go into Hyperdrive - 11th Feb 16
More Bankruptcy For Your Retirement Portfolio - 11th Feb 16
2016 - Gold & Silver Rising: A Gold And Silver Bottom May Be In - 11th Feb 16
Gain Trading Confidence by Improving Your Elliott Wave Analysis Skills - Video - 11th Feb 16
With A Gloomy Start To 2016, A Bust Seems Just Around The Corner - 11th Feb 16
UK Interest Rates, Economy Forecasts 2016 and 2017 - Video - 10th Feb 16
World Markets Are in Sync - 10th Feb 16
If You Miss Buying Gold – You Will Regret, it Later - 10th Feb 16
The Fed Doesn't have a Clue! - 10th Feb 16
How Far Can Gold Price Go? - 10th Feb 16
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

Dodge Japan's Economic Bullet by Investing in South Korea

Economics / Asian Economies Sep 05, 2008 - 12:34 PM GMT

By: Money_Morning

Economics Best Financial Markets Analysis ArticleMartin Hutchinson writes: have been much more positive about the Japanese economy than most other analysts in recent months, largely because I believed that many of the problems from the Japanese recession of 1990-2003 were finally in the country's rearview mirror. In particular, I believed that the Japanese budget deficit – which, by 2003, had become quite acute – was well on the way to being solved through public spending restraint. That, in turn, would allow Japan to pay down its excessive public debt, giving its private sector room to expand.


But the surprise resignation of Japanese Prime Minister Yasuo Fukuda on Monday suggests I may have been wrong about the country's near-term prospects.

Japan Gives Investors a Bubble Bath

The Japanese stock market and real estate bubble of the 1980s is now the stuff of stock-market legend, for it sent that country into a tailspin in 1990-91, after which came more than a decade of very slow growth.  There were a number of causes – one was the appalling quantity of rubbish loans that Japanese banks had put on their books during the bubble (sound familiar…. perhaps we are we seeing a reprise here in the U.S. market? ), and the second was the inexorable expansion of the Japanese public sector.

Prime minister after prime minister would propose “stimulus packages” of public spending, mostly on roads and bridges in rural areas (always popular with politicians from those areas). The largest package – by Prime Minister Ryutaro Hashimoto in 1998  – was more than $400 billion, the equivalent of 10% of Japan's gross domestic product (GDP).

Apart from covering Japan's beautiful scenery with unsightly overpasses, these capital infusion packages had two very clear effects:

  • They increased Japan's public spending – from 31.5% of GDP in 1991 to 38.1% of GDP in 2002.
  • And they created a huge public debt problem; Japan currently has public debt of 182% of GDP, the highest ratio in the world.

These stimulus packages had one very obvious shortcoming – they didn't stimulate. And with good reason. These programs did nothing useful to revive the Japanese economy because the mostly useless public works projects they financed (in terms of GDP, these projects were more than twice as large as those of the next-most-profligate public-works spender – France) were using up all the domestic capital that should have been financing private-sector growth. In the parlance of economics, this is known as “ crowding out ,” and can be quite damaging, as Japan's experience demonstrates.

Japan's Prime Minister Troika

Since 2003, the key figure in Japan's economic recovery is former Prime Minister Junichiro Koizumi (2001-06), who stopped building “bridges to nowhere” – prompting major protests from the Liberal Democratic Party (LDP) “old guard.” That stopped the growth in debt and then gradually brought the budget deficit down. As a result, Japan's economic growth resumed in 2003.

Koizumi was succeeded briefly by Shinzo Abe , and then by Fukuda. Like Koizumi, Fukuda was a proponent of reducing public spending – he wanted to balance the Japanese budget by 2011. Indeed, Koizumi and Fukuda were actually quite close: Koizumi got his political start under the premiership of Fukuda's father (also a tight-budget man) in the 1970s. So you can see why I was so confident that Japan's public spending would be kept under control and that the Japanese economy would continue recovering.

Japan's GDP showed a surprise dip in the second quarter, shrinking by 0.6%. As a result, public clamor arose for a “stimulus package” of public spending or tax cuts . The reality, however, is that Fukuda had been having a hard time since July 2007, because the upper house of the National Diet (which has considerable power) had been controlled by the opposition Democratic Party of Japan , blocking legislation.

Fukuda's weakness was demonstrated by his Aug. 1 appointment of his political opponent, Taro Aso , as secretary general of the LDP. When Fukuda's cautious Aug. 29 stimulus package of $18 billion – which consisted mostly of loans – was decried as inadequate, he realized that the clamor for extra spending would be unstoppable, and resigned.

Fukuda will likely be succeeded by Aso, a protégé of the big-spending barons of the rural constituencies.

Déjà vu all Over Again

The bottom line is that the public sector is likely to grow again, as it did in the 1990s, producing larger Japanese budget deficits, packing on more debt and stifling private sector development. Since Japan's public debt is already so high, the chances are good that the country's debt rating of AA ( Standard & Poor's ) /Aa3 (Moody's Investors Service ( MCO )) will be downgraded. That would increase borrowing costs for all Japanese companies and damage the economy badly.

For more than a year, I had been positive on the Japanese economy, even as the market declined. But it's finally time for a shift in outlook:

In the meantime, until it becomes clear that this China-Japan connection can pump up the Japanese economy, there's another Asian market – actually, one of the “ Four Asian Tigers ” – that's clearly worth a look as an alternative.

And that market is Korea.

Korea's Profit Promise

The Korean government recently improved with the election of president Lee Myung-bak and a pro-business party with a substantial majority. Korea's economic growth is likely to accelerate, particularly if we have seen the worst of the commodity and energy bubble, since Korea is primarily an importer of commodities and energy goods.

The Korean stock market has been beaten down this year, dropping 20%, and currently trades at only 10 times earnings. But this low valuation is undeserved, since the Korean economy is expected to grow at better than a 4% clip for both this year and next, according to the respected global-economics magazine, The Economist .

Take a look, for example, at the Korean exchange-traded index fund (ETF), the iShares MSCI South Korea Index Fund ( EWY ), which tracks the Morgan Stanley Capital International Korea index. The ETF currently carries a Price/Earnings (P/E) ratio of 10.3 and features a dividend yield – after expenses – of about 1.9%.

[ Editor's Note : For additional insights on Korea, check out Money Morning's investment research report: Why South Korea is set to Become the Biggest Economic Story of 2008 . The report is free of charge. For broader investment insights on Asia in general, check out our research report on the once-in-a-lifetime profit plays being created by China's emergence – and find out how you can get a free copy of investing guru Jim Rogers' bestseller, “ A Bull in China .” Money Morning recently ran a two-part story ( Part I and Part II ) detailing our most recent exclusive interview with the global-investing guru.]

News and Related Story Links :

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History