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Monday, November 10, 2003

Japanese Economy: Between the Deep Blue Sea and the Devil

Initial reactions to this weekends elections don't exactly seem to be too favourable. In the background cis the problem that many Japanese are disappointed by the failure to generate improvement in the real - as opposed to the financial - economy. In the foreground foreign investors are now getting nervous about how the results will affect the 'reform process'. My opinion was that all the optimism has been extremely superficial. Nothing important has really changed in Japan. The deflation problem is still there. 'Painful' structural reforms are not going to win votes. Nor are ageing voters with savings are not easily going to buy the 'inflation targeting' alternative. This week I will try and post a bit more around the Japan topic.

Japan's Prime Minister Junichiro Koizumi may be forced to make more compromises on economic reform after Sunday's Lower House election gave more clout to both the opposition and the old guard within his party. Although the ruling three-party coalition retained control of parliament, Koizumi's Liberal Democratic Party (LDP) lost a large number of seats to the opposition Democratic Party and was unable to retain the Lower House majority it had held on its own.

This shift in the political map may embolden Koizumi's foes within the LDP, who consider his reform policies too hawkish. It also strengthens the opposition Democrats, who support the need for change but think prime minister has his priorities wrong. Koizumi's double-bind means foreign investors, who have led the Tokyo stock market's 40 percent rebound since April, may temper their optimism about an overdue economic turnaround and trim their holdings of Japanese equities, analysts said.

Gross domestic product (GDP) figures due out next Friday are expected to show a marked deceleration in Japan's economic expansion, keeping markets edgy and voters unconvinced about the progress on Japan's overdue economic restructuring. "Given the LDP's weak showing, which could have been even weaker had it not been for the low turnout, I think stocks will come under pressure," said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein in Tokyo.

"A lot of U.S. funds close their books at the end of November and they have already begun selling off some of the Japanese shares they had bought over the last several months," he said. The Tokyo market's blue-chip Nikkei average closed last week at 10,628.98, up nearly 40 percent from 21-year lows set in April but off about five percent from last month's peaks above 11,000.Shirota said the election results were also slightly negative for the yen, which rose to a three-year high of around 107.85 to the dollar in October before ending last week at around 109.30.Bonds could also come under pressure if Koizumi's weaker position led to a deterioration in his fiscal discipline policy, analysts said......

"What this tells us is that for the voters, Japan's economic recovery has not been tangible. Gross domestic product has not really recovered on a nominal basis and people are tired of hearing about structural reform," said Shirota at Dresdner. Japan's GDP figures for the July-September quarter, due out on Friday, are expected to show the economy narrowly escaped contraction and expanded for the seventh consecutive quarter in real terms, after accounting for price deflation.

But in nominal terms, GDP is likely to have contracted after registering marginal growth for a couple of quarters. A Reuters survey of 26 economists produced a median forecast of a quarter-on-quarter rise of 0.3 percent in real terms. On an annualised basis, the consensus forecast was for a gain of 1.2 percent, markedly slower than 3.9 percent in April-June and U.S third-quarter growth of 7.2 percent in annual terms.
Source: Forbes

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