Friday, November 16, 2012

Japan's public works stimulus provides support to the equity market

Public construction projects in the US have been on a decline since 2009, as the effect of the stimulus package was offset by cuts at the federal, state, and local levels. This decline in public construction spending  contributed to a slower economic recovery.

US Total Public Construction Spending (source: Ycharts)

Japan on the other hand has taken a different approach. The government has been boosting public works contracting and is expected to do more. With BOJ standing ready to buy more government debt and the economy in another recession, this form of stimulus becomes a serious option. Apparently the out-of-control government debt levels just don't matter much any more. Plus it is politically easy to justify spending on disaster area reconstruction - even if some of those funds have been misappropriated (see story from the Japan Times). Public works spending is up 28% on a year-over-year basis.

Japan public construction spending YoY (source: Credit Suisse)

Japan's equity markets of course applauded public money flowing into the corporate sector. Construction spending combined with the weakening yen, pushed Nikkei toward the upper end of the range in which the market has been stuck for some time now.

Businessweek: - Kajima, Japan’s top construction company by revenue, soared 6.4 percent to 232 yen. Shimizu surged 7.9 percent to 245 yen, while Obayashi Corp. (1802) jumped 6 percent to 369 yen.
And there are expectations now that Japan's (potentially new) government will dump even more into public works projects going forward.
Businessweek: -“There’s speculation that a government led by the Liberal Democratic Party will increase public works and investment,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees about $75 billion. “That’s boosting construction and property companies.”
Between construction spending and BOJ potentially following the Fed in pursuing unlimited balance sheet expansion, Japan's economic growth now fully relies on government stimulus.
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