LAST month I pointed out that the Nikkei’s chart looked terrible and said that Japan’s economic fundamentals were grim – national debt is around 200 per cent of GDP (and rising) and the country’s demographics look terrible. While other major indices had ground steadily higher following a shallow summer correction, the Nikkei looked trapped in a downtrend.

This move lower coincided with the Liberal Democratic Party losing power following 50-odd years of control. The new government announced that they were relaxed about the yen’s strength. Finance minister Hiroshisa Fujii went as far to say he saw a strong yen as desirable since it gave consumers increased purchasing power. But this statement put further downward pressure on the stocks of domestic manufacturers and exporters – already suffering from the financial crisis.

All this changed in December after Fujii announced a new $81bn stimulus package. While the announcement was short on detail, the Nikkei rallied 17 per cent and now stands at its highest level for 15 months.

Last week Fujii stepped down due to ill-health and was replaced by Naoto Kan, who is understood to be much keener than his predecessor to boost government spending.

Many see such spending as the only solution to Japan’s continuing deflation. But there is a danger that Kan may be too keen to increase the fiscal deficit. Although its adherents can’t see a palatable alternative, this policy hasn’t worked so far. What’s more, global economic conditions are very different from what they were in the 1990s.

With so many major economies opening up the spending tap, Japan has more competition for its debt than ever before. It is issuing more debt than it raises from taxes, so any rise in yields would place a horrendous burden on the country’s ability to service its commitments.