Country Report Japan February 2009

Summary

The ruling Liberal Democratic Party (LDP) is likely to lose a large number of seats to the main opposition Democratic Party of Japan (DPJ) in the parliamentary election that must take place by September 2009.
China’s economic and military ascent underscores the importance of Japan’s diplomatic and military alliance with the US. The lack of effective political leadership in Japan could, however, strain ties between the two countries.
On January 22nd the Bank of Japan (BOJ, the central bank) kept its target for the overnight call rate at 0.1%. The limited room left to use interest rates to boost the economy will require the use of more unconventional measures.
The deteriorating outlook for the global economy has led the Economist Intelligence Unit to slash its real GDP forecast for Japan in 2009 to a contraction of 3.8%, compared with a fall of 2% previously.
As a result of the downward adjustment to our forecast for real GDP in 2009, we now expect consumer prices to fall by 0.5% this year (compared with a projected decline of 0.2% in our January report).

The combination of a number of political gaffes by the prime minister, Taro Aso, with the perception that he is trying to prolong his tenure has offended a voting public that longs for responsible leadership.
The DPJ is in a position to block a stimulus package that is being sought by Mr Aso, as it enjoys a majority in the House of Councillors (the upper house of parliament).
Mr Aso's vulnerable position has been highlighted by a former reform minister, Yoshimi Watanabe, who in January publicly denounced Mr Aso's government and defected from the LDP.
The recession that began in the second quarter of 2008 and became more severe during the remainder of the year has forced the government off the path of structural reform and on to one of fiscal stimulus.
The BOJ is running short of conventional monetary weapons in its battle against the effects on Japan of the global financial crisis. At its monetary policy meeting on January 22nd it left its target interest rate unchanged.
The government has yet to publish preliminary estimates of real GDP growth for the fourth quarter of 2008, but data releases for other indicators have been consistently negative in recent months.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;60;37
NAICS Code: 22;52;336