Japan's Weak GDP Report Holds Back the Dow

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down slightly following a weak GDP report from Japan over the weekend. As of 1:15 p.m. EDT the Dow is down 0.23% to 15,390, while the S&P 500 (SNPINDEX: ^GSPC  ) is down 0.25% to 1,687.

While there were no U.S. economic releases today, later this week we will be getting numerous reports on inflation, retail sales, industrial production, and the health of the housing market. Over the weekend the Japanese government reported that its second-quarter GDP grew 0.6% quarter over quarter, or 2.6% year-over-year, falling short of respective analyst expectations of 0.9% and 3.6%.

Japan has been pursuing a strategy that has been termed "Abenomics" in an effort to jump-start the Japanese economy. The risky part of the strategy is that the Japanese government is using debt to spur the economy, though the country already has a massive debt load -- Japanese government debt recently hit 1 quadrillion yen, or roughly $10.5 trillion. While that's an absurdly high number, still worse is that it's more than 200% of the country's GDP. Economists have historically worried when a country's debt-to-GDP ratio hits 90%, as at that level interest payments start taking up a large part of a country's GDP.

While the effects of quantitative easing and fiscal stimulus are starting to be seen, the big unknown is whether the government will be able to make meaningful progress toward structural reform of the economy to get companies to invest more. Japan has historically been a hard market to compete in, as protectionist measures on both the corporate and government sides hinder healthy competition. Abenomics' third effort to stimulate the economy involves deregulation, stronger corporate governance, and labor market reform. Of the three strategies, this will be the hardest to see through, as it will be politically unpopular with many groups who have vested interests to maintain the status quo.

While Japan faces the daunting task of restructuring its economy, the U.S. is pursuing its own strategies to spur economic growth. The Federal Reserve has bought $3 trillion worth of long-term assets in an effort to lower rates, while the government has piled on more than $10 trillion of new debt since 2000. Our debt-to-GDP ratio is a comparatively manageable 100%, but with whopping annual deficits of $1 trillion, millions of Americans are asking: What the heck is going on?

The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!


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