Japan Not Home-Free Despite Strong GDP

Japan Not Home-Free Despite Strong GDPIn these pages, I recently discussed the amazing returns in the benchmark Nikkei 225 index in Japan and how the country is following America’s example, printing money to fuel the economy.

The fact is that Japan is finally beginning to see some results from Prime Minister Shinzo Abe’s aggressive strategy to inject $2.4 trillion into the Japanese economy over the next decade.

Maybe this time it’s for real. Previous attempts to drive Japan’s economy out of its economic tailspin have failed. Of course, it will take some time, and success will depend on the continued weakness of the yen and a pickup in the global economy, especially with the country’s key trading partners in China.

If the first quarter was any indication, the despair in Japan may be finally coming to an end after decades of disappointment; but again, it’s only one quarter.

Japan saw its gross domestic product (GDP) surge 0.9% in the first quarter or an annualized rate of 3.5%, according to data from Japan’s Cabinet Office. (Source: “Japan GDP Rises 0.9% On Quarter In Q1,” RTTNews, May 15, 2103.)

What’s also interesting is the rise in private consumption in Japan, which contributed to 2.3% of the 3.5% GDP growth. The upward move in consumer spending is critical, as a large part of the economic renewal in Japan will be dependent on consumer spending as is the case in the United States. According to Trading Economics, consumer spending accounted for about 60% of GDP in Japan, so it’s essential.

While it’s still way too early to see if Japan is on the path to growth, the country’s first-quarter GDP was encouraging. Yet there are also many obstacles in Japan’s way to a full-blown recovery.

First of all, its key trading partner, China, needs to grow and avoid an economic bubble. If China falters, so will the trade between the two Asian powerhouses.

I also continue to be concerned with the massive debt Japan is adding to its already fragile and debt-ridden balance sheet. I have long been critical of the Federal Reserve and its free-flow printing of money here, but Japan is also in a similar situation, and it could worsen.

Japan’s national debt as a percentage of its GDP was a monstrous 208.2% in 2011, whereas the U.S. national debt as a percentage of GDP was at 102.9%. (Source: International Monetary Fund, May 17, 2013.)

This will be a precarious situation for Japan, especially if the country fails to rise from its downtrodden state. It’s a $2.4-trillion gamble that I’m not even sure Vegas would take.