Country Report Japan September 2009

Outlook for 2009-10

• The Economist Intelligence Unit forecasts that the opposition Democratic Party of Japan (DPJ) will win a resounding victory in the election for the House of Representatives (the lower house of parliament) on August 30th.
• The DPJ has expressed a desire to complement Japan's alliance with the US with closer relations with China and the rest of East Asia, but there is unlikely to be a major change in policy towards the US.
• Fiscal stimulus packages, combined with lower tax revenue, will cause the budget deficit to widen to 7.4% of GDP in 2009 and 8% in? 2010.
• The Bank of Japan (BOJ, the central bank) is expected to keep its main policy interest rate, the target for the overnight call rate, at 0.1% for the remainder of 2009 and throughout 2010.
• The forecast contraction in real GDP in 2009 has been revised to 6.2%, from 6.8% previously, following an unexpectedly strong performance in the second quarter. The recovery in 2010 will be modest, with growth forecast at 1.3%.
• The domestic corporate-goods price index was down by 8.5% year on year in July. This, combined with substantial excess capacity in product markets, reinforces our view that Japan will experience price deflation in 2009-10.

Monthly review

• The DPJ has launched a full-scale electoral assault by appealing to interest groups that have traditionally supported the ruling Liberal Democratic Party and promising to decentralise political and economic power.
• The DPJ seems determined to emasculate the civil service and increase the power of the government over the legislative process. If elected, it plans to assign some of its parliamentarians to work in government ministries.
• The BOJ faces uncertainty now that a change of government appears likely, and is therefore anxious to learn whether a DPJ administration would attempt to exercise a greater degree of influence over monetary affairs.
• Japan has joined the list of economies that have emerged from recession. Real GDP grew by 0.9% quarter on quarter in April-June, ending a run of four consecutive quarters of contraction.
• Many construction firms and property developers are in trouble, and several of the investment groups that are most exposed to real estate saw their profits plummet in the first half of 2009.
• Japanese companies have cut their staffing levels with unprecedented rapidity. The unemployment rate has consequently surged, rising from just 4% in late 2008 to 5% in April 2009 and 5.4% in June.