Country Report Japan December 2008

Summary

Although the prime minister, Taro Aso, would like to delay the next general election until at least April 2009, he may be forced to hold it in late January. His ruling Liberal Democratic Party (LDP) will lose seats in the poll.
Tensions between Japan and the US could increase further, owing to the latter's decision in October to remove North Korea from its list of countries sponsoring terrorism. However, Japan and the US will remain strategic allies.
The government will seek to use fiscal stimulus in an effort to boost the weakening economy. This additional spending will put pressure on Japan's already poor fiscal position, particularly in 2009.
Real GDP growth will be negative in 2009the first year of contraction since 1998largely because the contribution made by the external sector will turn negative amid a deceleration in global economic growth.
The yen will continue to benefit from heightened risk aversion, and will hold on to most its recent gains. It is forecast to average 97:US$1 in 2009 and 96:US$1 in 2010, compared with an estimated 103.6:US$1 in 2008.
Export growth will be hit hard in 2009 as many parts of the developed world struggle with recession. Merchandise exports are forecast to fall by 1.6% in US dollar terms (equivalent to a 9% fall in yen terms) in 2009.

Mr Aso is trying to make the most of the current parliamentary session by focusing on financial, fiscal and defence issues.
The Japanese economy is in dire condition, having contracted in size in the second and third quarters of 2008 and showing every indication of continuing to do so for several more quarters.
To counteract the deterioration in economic prospects, the government enacted a modest stimulus package in October and then announced that it would start formulating another, more aggressive package as soon as possible.
On October 31st the Bank of Japan (the central bank) cut its target for the overnight call rate to 0.3%, from 0.5% previously.
The decline in Japanese exports, which started in exports destined for the US in late 2007 and spread to those heading for European markets earlier this year, has now spread to exports aimed at East Asia.
Deflation has reared its head again, with the prices of corporate goods down by 1.6% year on year in October.

Source: Country Report