Country Report Japan May 2009

Summary

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.
A financial scandal involving a close aide of the DPJ leader, Ichiro Ozawa, is unlikely to provide more than a temporary boost to the public approval ratings of the prime minister, Taro Aso of the LDP.
In early April the government announced that it would seek financing for a stimulus package worth 15.4trn (around US$160bn, equivalent to 3% of GDP). However, it will have difficulty gaining the support of the DPJ.
On April 7th the Bank of Japan (BOJ, the central bank) decided to keep its target for the overnight call rate at 0.1%. With policy interest rates so low, the BOJ is likely to focus on boosting liquidity through less conventional means.
The latest Tankan survey of sentiment in Japan's corporate sector showed that business confidence is at a 35-year low. This reinforces the Economist Intelligence Unit's view that Japan's economy will contract sharply in 2009.
The yen has weakened significantly against the US dollar since mid-January. In response, we have revised down our forecast of the yen's average value in 2009 to 96.3:US$1, from 94:US$1 previously.

It is unclear whether LDP members who dislike Mr Aso could prevail in forcing the party to replace the prime minister with someone more popular, or whether they will stay with him ahead of the parliamentary election.
The DPJ's prospects have been clouded since March, when Mr Ozawas chief aide, Takanori Okubo, was indicted for the offence of violating the Political Funds Control Law.
North Korea launched a missile across the Japanese archipelago and towards the US on April 4th. The move has been condemned by both Japan and the broader international community.
In early April Mr Aso endorsed a fiscal package worth around 3% of GDP. Much of this new stimulus consists of incentives and credit guarantees. Other measures include tax cuts and greater infrastructure spending.
The BOJ has stepped up its policy of quantitative easing, whereby the central bank purchases a range of assets from private-sector investors.
Industrial production was down by 38% year on year in February, while output in the automotive industry registered an even steeper fall, at 56%. The worsening economic situation is resulting in lower wages and also deflation.