Country Report Japan November 2008

Outlook for 2009-10

• The new prime minister, Taro Aso, is expected to delay calling an early general election until the first half of 2009, but his ruling Liberal Democratic Party (LDP) will still lose seats in the poll.
• Tensions between Japan and the US could increase, 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 increase by just 1.4% in US dollar terms (equivalent to a 5% fall in yen terms) in 2009.

Monthly review

• Mr Aso's cabinet is filled with the prime ministers allies, and has hence failed either to unite the ruling party behind the new government or to impress the electorate.
• There is a risk that the LDP's junior coalition partner, the increasingly restive New Komeito, might form an alliance with the opposition Democratic Party of Japan.
• In early October the US removed North Korea from its list of state sponsors of terrorism. This has infuriated the Japanese government.
• The government and the Bank of Japan (the central bank) have continued in their efforts to stabilise the economy and the financial system. The government is also likely to recapitalise financial institutions if required.
• The gradual slowdown of the US economy over the past year has cast a shadow over Japan, with leading economic indicators suggesting that the Japanese economy will soon be in recession.
• Unemployment stood at 4.2% in August, compared with 3.8% in March. Weakness in the external sector, which is very important to the domestic economy, is the main reason for the deterioration in the labour market.

Source: Country Report

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