Stimulus U-Turn

• Wednesday's Fed meeting yielded no new surprises—it kept rates steady and acknowledged the US is headed back toward growth mode.
• The global economic picture is improving overall—but an area to watch is Japan, where a different political party is taking the helm.
• The DPJ decided to postpone a portion of the economic stimulus package approved during the last administration, citing wasteful spending.
• Choosing fiscal conservatism over stimulative spending may hinder Japan's economic recovery compared to other countries.

The Fed concluded its Federal Open Market Committee (FOMC) meeting Wednesday and released an unsurprising statement hinted at for days: It will hold steady on rates, and though risks remain, the US is headed back toward growth mode. Beyond the US, overall, the global economic picture continues improving too, led by fast growing emerging markets, particularly China.

Individually, however, single countries may continue to experience the occasional pothole—some self-inflicted. For example, the political winds recently shifted in Japan, with the Liberal Democratic Party (LDP) ceding power for the first time in over 50 years (excepting a brief interruption in the 1990s). For the last year or so, the world has been largely, if not officially, coordinated in its monetary and fiscal stimulus efforts. Yet the incoming Democratic Party of Japan seems set to take a sharp U-turn on Japan's current economic stimulus policy.

Why now? The DPJ cited "wasteful" government spending and, perhaps further buoyed by the Bank of Japan's positive outlook, decided to postpone $54 billion of the $165 billion economic stimulus package approved during former Prime Minister Taro Aso's political reign. But what stimulus package couldn't be accused of having some (or a lot of) "wasteful" spending? Fiscal stimulus spending is typically inherently sloppy, imprecise, and often ill-spent on the first go. But every dollar spent by a government usually gets re-spent multiple times, increasing velocity and eventually helping the economy overall. In our view, private firms and citizens are infinitely wiser spenders than any government, but on average, the later, smarter spends largely outweigh the less optimal first government spend.

Further, yanking stimulus now might slow or even derail Japan's nascent recovery. The DPJ choosing fiscal conservatism over stimulative spending may worry investors. In fact, since March's global stock market bottom, Topix, the Tokyo Stock Exchange index, boomed—up 45.5% through August. But since Japanese elections were held August 30th, the Topix is down 0.6, while world stocks have continued higher (+4.3%).*

Japan's planned departure from the loosely coordinated, global stimulus efforts may not be ideal for Japan, but that's never hindered global stocks before. Though Japan is the world's 2^nd largest single economy, it's just 7% of the total. Japan's economy and stock market have experienced fits and starts for nearly two decades, but that hasn't inhibited global stocks one bit—and likely won't in the future.

* Source: Bloomberg. Percentages calculated in US dollars.