Abe's Election Defeat and the Japanese Economy

From Bloomberg this week:


Abe's Election Defeat May Threaten Economy, S&P Says

Japanese Prime Minister Shinzo Abe's Upper House election defeat may weaken the economy and hamper efforts to reform the tax and pension systems, Standard & Poor's said.

``Such reforms are particularly important to increase the economy's growth potential and to meet the long-term challenges of Japan's aging population,'' Takahira Ogawa, an S&P credit analyst based in Singapore said in a report.

Abe said this week he'll stick to a goal of cutting spending to balance the budget by 2011 and stop the expansion of Japan's debt, the world's largest. The Democratic Party of Japan took control of the Upper House on Aug. 8. It opposes proposals to increase Japan's 5 percent sales tax and has pledged to expand subsidies to farmers, small businesses and households.

The prime minister's ``weakened power'' may force the government to ``navigate the between the two houses'' of parliament and compromise on economic policy, S&P's Ogawa said.

Japan's economy is expanding moderately, with corporate investment in machinery and equipment proving reasonably resilient, the report said.

Ogawa forecasts economic growth of 2.3 percent for the year to March 31 and 2.1 percent in fiscal 2008.

The ruling Liberal Democratic Party's defeat makes the Bank of Japan's decision on whether to raise interest rates this month ``more complicated'' because of the uncertain political situation, Ogawa said.

Investors see a 75 percent likelihood of a rate increase on Aug. 23, according to Credit Suisse Group calculations based on the exchange of interest payments.

The yield on Japan's benchmark 10-year bond rose 6 basis points to 1.82 percent at 12:20 p.m. in Tokyo.

S&P raised the rating of Japan's debt in April by one level to AA, its third highest investment grade. Japan's public debt is projected to reach 773 trillion yen ($6.5 trillion) by March 2008, or 148 percent of gross domestic product.