Japan Infrastructure Report Q2 2009

January export numbers for Japan painted a grim picture, reinforcing BMI's prediction that GDP will contract by 2.3% in 2009. The figure is comparable to other Asian export-oriented economies, which we anticipate to be affected badly by the global slowdown. As one of the most highly developed economies in its region, Japan's infrastructure sector has nonetheless struggled with poor growth since the early 90s.

Despite a slight recovery in 2006 and 2007, last year saw pronounced negative growth estimated at -3.8% year-on-year (y-o-y). This contraction is expected to continue throughout 2009 with construction sector growth of -2.01% forecast.

In common with many countries policies around the world, the Japanese government has backed a stimulus package to maintain the economy. Despite some success, the Prime Minister Taro Aso and his Liberal Democratic Party (LDP) have seen a dramatic loss of confidence in polls, raising doubts about either's ability to remain in office and govern successfully. Topics such as the mooted use of government funds to prop up the stock market have also fuelled concern about the wise allocation of state resources, at a time when efforts should be channelled towards resuscitating domestic demand.

While this current political turmoil continues it is likely to negatively impact Japan's ability to deal with economic problems, and in particular resuscitate the infrastructure sector, which is very closely linked to government spending. Although opinion polls indicate historically low popularity for Prime Minister Aso and the LDP party, an unfolding donation scandal is hurting the prospects of a decisive victory by the main opposition Democratic Party of Japan (DPJ), and could yet prompt DPJ leader Ichiro Ozawa to resign.

Despite these difficulties at home, Japan is strengthening ties with neighbouring states through lending stimulus. This includes a proposal for financial assistance of more than US$17bn to Asian countries over three years in order to combat the global economic downturn, and a bilateral swap agreement between Japan and Indonesia of US$12bn.

Energy security has also been on the agenda, with a consortium of three major Japanese companies - Tokyo Electric Power (Tepco), state-backed Japan Bank for International Cooperation (JBIC) and Toshiba - agreeing to buy 117mn shares in Canadian uranium producer Uranium One, in a private placement totalling CAD270mn (US$220mn). This gives the consortium the option to buy a further 20% of the company's available production, part of a broader strategic relationship agreed between all four.

With nuclear production accounting for around 30% of Japan's electricity, reliance on imported uranium is a key issue. This deal aims to build on previous investments by Japanese firms designed to secure strategic stakes in suppliers overseas and shield nuclear operators from the fluctuating price of raw materials.

In terms of construction and infrastructure in Japan, the country's existing high level of development combined with economic stagnation has meant that relatively few deals have been carried out beyond essential infrastructure upgrade work.