Country Report Japan March 2009

Outlook for 2009-10

• The ruling Liberal Democratic Party (LDP) faces defeat at the parliamentary election that must take place by September, opening the way for the main opposition Democratic Party of Japan (DPJ) to take power.
• The economic calamity engulfing Japan has caused what is likely to prove to be a politically fatal decline in popular support for the LDP prime minister, Taro Aso. Mr Aso could even be forced to step down before the next election.
• Following two relatively small stimulus packages in 2008, parts of which still await parliamentary approval, the government is considering a vastly bigger stimulus package of up to 30trn (US$320bn, or 6% of GDP).
• Given that interest rates are close to zero, the Bank of Japan (BOJ, the central bank) will extend its policy of quantitative easing, aimed at expanding the money supply through open-market operations.
• 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 5.9%, compared with a fall of 3.8% previously.
• As a result of the downward adjustment to our forecast for real GDP in 2009, we now expect consumer prices to fall by 1.3% this year, compared with a projected decline of 0.5% in our February report.

Monthly review

• Events in February proved profoundly debilitating for Mr Aso. They included an attack by a former prime minister, Junichiro Koizumi, who insinuated that the LDP could not win a national election under its present leadership.
• The new US secretary of state, Hillary Clinton, visited the Japanese capital, Tokyo, on February 16th-18th as the first stage in her inaugural journey to East Asia, in an effort to signal the US's commitment to its alliance with Japan.
• At its February policy meeting, the BOJ announced that it would purchase up to 1trn in equities from financial institutions, together with a similar volume of corporate bonds, in order to reduce companies fundraising costs.
• The economy has continued to contract at an alarming rate: following a 3.3% quarter-on-quarter decline in GDP in the fourth quarter of 2008, industrial output plummeted by 10% month on month in January.
• Merchandise exports fell by 53% year on year in January. The collapse has damaged Japanese manufacturers, which sell much of their output abroad and whose profitability and capital budgets have consequently shrunk fast.
• The annual rate of consumer price inflation fell to zero in January, suggesting that deflation is set to return to Japan.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52