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Country Report Japan .0 October 2007 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com. Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office. Copyright © 2007 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-6681 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Japan 1 Japan Executive summary 2 Highlights 3 Outlook for 2008-09 3 Political outlook 4 Economic policy outlook 5 Economic forecast Monthly review: October 2007 9 The political scene 11 Economic policy 13 Economic performance Data and charts 16 Annual data and forecast 17 Quarterly data 18 Monthly data 20 Annual trends charts 21 Monthly trends charts Country snapshot 22 Political structure Editors: Miho Tanaka (editor); Gerard Walsh (consulting editor) Editorial closing date: September 25th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected] Monthly Report October 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007 2 Japan Executive summary Highlights October 2007 Outlook for 2008-09 • The immediate task of the new Liberal Democratic Party (LDP) prime minister, Yasuo Fukuda, will be to improve the support ratings for his government, especially in rural communities. • The government would prefer to hold the next election to the lower house, which is not due until September 2009, some time in 2008, but the opposition will be pressing for the poll to take place as early as possible. • Mr Fukuda will face a difficult balancing act between growth-oriented and redistributionist policy agendas. Volatile domestic politics will constrain Mr Fukuda!s foreign policy options. • The opposition Democratic Party of Japan (DPJ) will take advantage of its newly won majority in the upper house to censure the government, probably in March 2008, in an attempt to force an early general election. • The Economist Intelligence Unit previously assumed that an increase in the consumption tax would be announced in 2008, to take effect in 2010, but we now believe that the increase will be delayed by a year. • With further US interest rate cuts in the pipeline and weaker GDP growth data releases, the Bank of Japan (the central bank) will postpone the next increase in its target for the overnight call rate until mid-2008. Monthly review • Shinzo Abe resigned suddenly as prime minister on September 12th following his failure to gain the support of the DJP for the renewal of the anti-terror law. • Of the two candidates who stood to replace Mr Abe, the LDP opted for Mr Fukuda!s reputation for efficient governance and moderate foreign policy over Taro Aso!s outspoken style. • Japan!s support in the Indian Ocean for the allied forces in Afghanistan will end on November 1st if the government fails to renew the anti-terror law in time. • The government has revised down its GDP growth estimate for the second quarter of 2007. GDP shrank by 0.3% in real terms compared with the previous quarter, rather than growing by 0.1% as originally indicated. • The yen has appreciated against the US dollar since August, imposing big losses on the numerous Japanese individual investors who have recently bought foreign-denominated stocks and bonds. Monthly Report October 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007 Japan 3 Outlook for 2008-09 Political outlook Domestic politics Yasuo Fukuda of the ruling Liberal Democratic Party (LDP) became Japan!s new prime minister on September 25th following the sudden resignation of Shinzo Abe earlier in the month. The public reaction to the LDP!s choice of the country!s new leader is yet to be seen, but will be crucial to the survival of the LDP as the dominant party in Japanese politics. Following the loss of its majority in the election to the House of Councillors (the upper house of parliament) in July, the LDP!s fear of losing the next election in the House of Representatives (the lower house) is immense. It will try to regain the public!s confidence and support by addressing the voter concerns that led to its recent election defeat. Particular efforts will be made to resolve such domestic issues as the scandal in which the state admits to having lost around 50m pension records, economic disparities between cities and rural areas, and misuse of political funds. Mr Fukuda and his new government will have to strike a difficult balance between appeasing the rural electorate and repairing the country!s fiscal position. In order to achieve the government!s target of bringing the primary budget (that is, the budget excluding debt repayments) into balance by fiscal year 2011/12 (April-March), an increase in the consumption tax will be required, but it is doubtful whether the LDP government will dare to broach such politically sensitive subjects as tax rises before the general election. An extraordinary parliamentary session, which was opened by Mr Abe just before he resigned, will resume on October 1st now that the new prime minister and his cabinet are in place. It will be dominated by the renewal of anti-terror legislation, which permits among other things Japan!s participation in the refuelling of US warships in the Indian Ocean. The main opposition Democratic Party of Japan (DPJ) will continue its opposition to the LDP-backed bill in the upper house, and will demand transparency in the details of the legislation using the DPJ!s newly won right (as the majority party in the chamber) to investigate government matters. Having hinted at his openness to compromise on this matter, Mr Fukuda may be able to reach a deal with the DPJ. The recently victorious DPJ may seem to be in the ascendant, but it has yet to establish its credentials as an alternative party of government. Formed in 1998 through the merger of several small opposition parties, the DPJ is a young entity, and this is the first time that it has been the biggest party in the upper house. In order to maintain momentum, the DPJ will have to clarify its policy platform. The party must also tread carefully in using its new dominance in the upper house: merely blocking government legislation will do little to convince voters that it is a credible alternative to the LDP as a responsible party of government. There are also concerns about the quality of the party’s leadership. The DPJ!s leader, Ichiro Ozawa, is ageing and ailing, and his appeal to voters is mixed. Monthly Report October 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007 4 Japan The next election to the lower house of the parliament is due by September 2009, but is likely to be called earlier, as the lower house rarely serves a full term. The opposition parties, led by the DPJ, will continue to call for an early election in the coming months. The pressure on the ruling LDP to call an election will mount in the next parliamentary session, which opens in late January 2008 for six months, particularly when the budget for 2008/09 is debated. The welfare minister will be grilled by the opposition parties on progress regarding the lost pension records, as Mr Abe promised in March to solve the problem "within a year". The two legislative chambers will come into dispute over who is to be appointed as the next governor of the Bank of Japan (BOJ, the central bank) in March, when the term of the current governor, Toshihiko Fukui, expires. If the LDP ignores the upper house!s decisions on any of these issues, the DPJ can go as far as issuing a censure motion against the prime minister or any of his cabinet members, and this could trigger a resignation or even a general election.