Country Report Japan August 2008

Outlook for 2008-09

• Despite its low level of popular support, the ruling Liberal Democratic Party is likely to fend off any attempt by the opposition to force an early general election.
• The next election for the House of Representatives (the lower house of parliament) must be held by September 2009, and the prime minister, Yasuo Fukuda, could soldier on until mid-2009.
• Although Japan and North Korea have resumed official discussions, Japan is unlikely to receive a full accounting for the 17 Japanese citizens whom North Korean agents kidnapped in the 1970s and early 1980s.
• An announcement regarding a rise in the consumption tax, probably to 7% (from 5% currently), will not be made until 2009 at the earliest, and any increase will not take effect before 2011.
• Given the economy's vulnerability to weak domestic demand and rising oil and commodity prices, the Bank of Japan (BOJ, the central bank) will delay the next increase in its target for the overnight call rate until early 2009.
• The economy probably contracted marginally in the second quarter of 2008 on a quarter-on-quarter basis, and the outlook for the third quarter is for further weakness. GDP is forecast to grow by 0.9% in 2008 and 1.2% in 2009.
• Consumer price inflation jumped to 2% year on year in June, triggering an upward revision to the Economist Intelligence Unit's inflation forecast, to 1.8% in 2008 (from 1.2% previously) and 1.4% in 2009 (1.2% previously).

Monthly review

• The government remains weak but is proving surprisingly durable as pressure on MrFukuda to step down diminishes.
• Although the government claims to have achieved many of its objectives as host of the G8 summit of leading industrialised nations on July 9th-11th, its success was attenuated by several secondary factors.
• Clouds are gathering on Japan's economic horizon. Inflation is at its highest for a decade, corporate profits are being squeezed hard and a further deterioration in Japan's already strained fiscal situation appears inevitable.
• The BOJ's policy board decided at its meeting on July 14th-15th to maintain a "neutral" monetary policy stance and left its target for the overnight call rate unchanged, at 0.5%.
• Recent falls in Japanese exports show that the global economic slowdown is having an impact not only on demand from North America and Europe but also on that from some Asian countries.