Country Report Japan October 2008

Summary

The new prime minister, Taro Aso, is expected to call an early general election for November, even though his ruling Liberal Democratic Party (LDP) is destined to lose seats.
The LDP and its junior coalition partner, New Komeito, are expected to lose their two-thirds majority in the lower house of parliament at the next general election, but they should be able to hold onto a simple majority.
Relations with North Korea will remain tense, as Japan struggles to receive a full accounting for the 17 Japanese citizens who were kidnapped by North Korean agents in the 1970s and early 1980s.
Given the economy's vulnerability to weak domestic demand, the Bank of Japan (the central bank) will delay the next increase in its target for the overnight call rate until 2010.
Japan's growth prospects over the next 18 months are poor, as the economy is gripped by recessionary conditions. GDP growth is forecast to average a meagre 0.7% in 2009, but should recover to 1.1% in 2010.
Weak economic growth and lower oil prices will push consumer price inflation down to an average rate of 1.4% in 2009 and 1% in 2010, after an estimated average of 1.8% in 2008.

Mr Aso won the LDP’s internal presidential election on September 22nd by an outright margin, and his elevation to the premiership two days later was a foregone conclusion.
A new cabinet was announced on September 24th that broadly reflects Mr Aso's own foreign and economic policy agendas, and popular demand for measures to shore up the economy.
Mr Aso has declared that he has not abandoned the fiscal year 2011/12 (April-March) target for a surplus in the primary budget, he has implicitly done precisely that.
Industrial output shrank by 0.7% quarter on quarter in the first two quarters of 2008. Historically, two consecutive negative readings in this variable have always been followed by a recession.
Japanese banks have avoided much direct exposure to the sub-prime mortgage crisis in the US, but have doubtless suffered significant losses owing to the collapse of several US financial institutions in September.
As a result of slower growth in Asia and a downturn in the US, Japan’s trade balance in August showed its first monthly deficit in 26 years.