Country Report Japan July 2009

Outlook for 2009-10

• The ruling Liberal Democratic Party (LDP) never had any prospect of retaining its two-thirds majority in the general election that must take place by September 10th, but it is now unlikely even to remain the largest party.
• The opposition Democratic Party of Japan (DPJ) has regained a commanding lead in the opinion polls, and its new leader, Yukio Hatoyama, is likely to become Japan's next prime minister.
• The government's fiscal stimulus packages, combined with lower tax revenue, will cause the budget deficit to widen to 6.8% of GDP in 2009 and 7.3% in? 2010.
• The Bank of Japan (BOJ, the central bank) will keep its target for the overnight call rate at 0.1% during the remainder of 2009 and throughout 2010, and may have to expand its policy of quantitative easing if the recession persists.
• The Economist Intelligence Unit forecasts that real GDP will shrink by 6.9% in 2009, following a collapse in exports and investment. The recovery in 2010 will be modest, with GDP growth forecast to average 1%.
• Deflation has returned to Japan, with consumer prices forecast to fall by 1.6% this year. Prices are expected to fall by 0.3% in 2010 as domestic demand remains anaemic.

Monthly review

• The latest opinion polls show that the DPJ has recovered from the fundraising scandal that forced the resignation of its former leader, Ichiro Ozawa. This has revived speculation about the fate of the LDP prime minister, Taro Aso.
• The DPJ's policy platform lacks clarity in terms of how many of its expensive policy proposals will be financed, but this is unlikely to entail a high political cost, given the unpopularity of the LDP government.
• For the most part, economic policy is on hold until after the lower house election, although both parties are addressing the recession and fiscal policy in their campaign preparations.
• Despite very loose monetary policy, credit conditions faced by corporate and household borrowers have remained tight.
• After a disastrous start to the year, the economy appears to be stabilising to some extent, with industrial production showing a month-on-month rise in April and exports increasing in March and April.
• Banks in Japan have not received as much government capital as US banks and some European banks, and they have suddenly found themselves looking fragile and needing urgently to raise funds.

Source: Country Report

This report covers the following industry codes:
SIC Code: 53;60;49;48;82;70;59
NAICS Code: 44;52;22;517;61;72