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Komeito will maintain its resistance to the government, including opposition to the budget itself. Nonetheless, we expect New Komeito to eventually back the budget-related bills in order to avoid adverse consequences for the public. It is even conceivable that New Komeito cooperation at this juncture could open the door to some kind of alliance with the DPJ, once the local elections are over. Some observers believe the Kan government could be shaken by a “June crisis”, in the event junior partner the People’s New Party pulls out of the ruling coalition, due to the failure to enact that party’s pet project (reversing postal privatisation). However, we think that, after April, the Kan government will find ways of working with the LDP and New Komeito so that key legislation can be enacted. If the LDP and New Komeito can change and cooperate with the DPJ, the anti-reformist bent of the People’s New Party will also have to change to some degree. It is our view that, once the April elections are over, all political parties will modify their approach to parliamentary affairs. Could Kan’s tenure be long-lived? Looking further ahead, there is a possibility, depending on the policies pursued, that Kan’s tenure as prime minister could be long by Japanese standards. One reason is that the political schedule is free of nationwide elections until 2013 (Upper House in July, Lower House in August). While Kan’s tenure as DPJ president (hence prime minister) is due to expire in September 2012, we expect he will be re-elected as replacing him at that juncture would likely mean a quick general election. Otherwise, the DPJ would again be slammed by the public and opposition for elevating its leader to the prime minister without the legitimacy of a Lower House election victory. Given the lengthy period without national elections, it would be hard for the opposition to fight the government on each and every issue. Accordingly, it is likely that some opposition parties will seek to link up with the Kan government on specific policies issues. This would allow them to build a record of achievement that could bolster their election prospects. Policy-wise, affinity is especially strong with New Komeito (one concern with a DPJ-New Kometo linkup is the fact that both tend to favour increased spending on social welfare etc). If Kan manages to survive the April local elections, his tenure as prime minister could prove long-lived provided supra-party cooperation is achieved on key policies. Non-partisan policies stand best change of enactment What kind of policies are likely to be enacted? The reality of a divided parliament means the DPJ’s wish list of programmes enshrined in its 2009 election manifesto must be revised, in the face of some internal resistance. Thus, the policies most likely to be enacted by a divided Diet are those that are truly nonpartisan in nature, such as: (1) comprehensive social security/tax reform including hiking the consumption tax; and (2) opening up Japan, including participation in the Trans-Pacific Partnership (TPP). These two issues were singled out by Prime Minister Kan in his press conference on 4 January. Comprehensive social security/tax reform is widely deemed to be the most pressing issue facing Japan today. In fact, the LDP and New Komeito have put forward similar proposals in this regard. The appointment of Kaoru Yosano as the minister for economic and fiscal policy in the new Kan government may be aimed at luring the LDP and New Komeito into cooperating on social security/tax reform. Yosano is an ex-LDP lawmaker who once served as finance minister. In that capacity, he helped draft plans for social welfare reform that were promoted by the former LDP-New Komeito coalition government. With Yosano as the point man on social security/tax reform, it should be easier to reconcile the ideas of the opposition and ruling camps. After all, if your ideas are accepted, continued opposition for opposition’s sake is absurd. Thus, if the obstacles to supra-party discussions can be overcome, perhaps real progress can be made on social security/tax reform. Unfortunately, at this juncture, this is probably still wishful thinking. Political realignment on TPP? As for the opening of Japan, the desirability of joining the TPP is not shared by all lawmakers. In fact, there is strong opposition to the TPP within both the DPJ and LDP, though opposition in the former case has more to do with Kan’s abrupt announcement than policy particulars. Given the strength of the farm lobby in Japan, discussions on the TPP probably won’t make much headway, even though “opening Japan” would be a good way to realise economic rejuvenation, as pointed out in Japan: PM Sets Out Two Key Challenges, Market Mover, 13 January 2011. On the other hand, progress in the TPP talks could lead to a realignment of the political landscape. Ryutaro Kono/ Azusa Kato 20 January 2011 Market Mover 28 www.GlobalMarkets.bnpparibas.com
Japan: Capex Outlook • Core machinery orders undershot expectations, falling 3.0% m/m in November. Despite this third straight drop, the net decline is within the range of payback for earlier gains. • Given the upturn in global manufacturing, domestic capex should pick up once exports and production escape their soft patch. • But with yen appreciation, changes in the demand structure and Japan’s shrinking workforce causing firms to focus more on expansion overseas, a vigorous recovery in domestic investment seems unlikely. • To arrest the effects of an ageing population, Japan in our view needs to participate in the Trans-Pacific Partnership. Orders fall for third straight month Undershooting expectations, core machinery orders fell 3.0% m/m in November, the third straight contraction. However, coming after gains of 8.8% in July and 10.1% in August, the net three-month drop is within the range of a reactionary decline. While the level for October-November is 6.9% lower than the Q3 average, it is still 2.1% above Q2, which suggests that orders continue to trend modestly higher. On this score, core orders minus mobile phones (which are not capital goods) posted 0.8% growth in November following a 0.6% advance in October. Capex to pick up, albeit modestly We believe that domestic spending on new plants and machinery will accelerate moving forward, though not to the extent of becoming a main growth engine for the Japanese economy anytime soon. Currently, the economy is in a soft patch, brought on by the slowdown in exports. Economic growth in Q4 2010 is likely to turn negative due to fallout from the end of stimulus programmes. But with global manufacturing picking up again from autumn, exports should resume expanding shortly (early indications suggest real exports could revive in December). Thus, once statistics confirm that exports and production have indeed escaped the soft patch, domestic capex should pick up the pace – especially among manufacturers eager to tap into voracious global demand for smart phones, tablets and other innovative products. That said, due to the correcting of the yen’s super weak tone – which, in our view, is the proper way to Chart 1: Core Machinery Orders (JPY bn, s.a.) 1300 1200 1100 1000 900 800 700 600 Monthly Quarterly 03 04 05 06 07 08 09 10 Source: Cabinet Office, BNP Paribas Chart 2: Machinery Orders (JPY bn, s.a.) 700 650 600 550 500 450 400 350 300 250 200 Manufacturing Nonmanufacturing 03 04 05 06 07 08 09 10 Source: Cabinet Office, BNP Paribas see the yen’s appreciation since the Lehman shock – coupled with changes in the demand structure (weakening of domestic demand due to population decline, emergence of Asian middle-class demand), to say nothing of Japan’s shrinking workforce, firms are focusing more on expansion overseas than investment at home. Hence, a significant acceleration in the domestic capex recovery looks unlikely. Manufacturers’ orders trending mildly higher A closer look at November’s machinery orders shows bookings by manufacturers jumped 10.6% m/m after rising 1.4% in October. Despite seesawing, orders by this sector are trending modestly higher. Core orders by non-manufacturers, meanwhile, fell sharply for a second straight month, plunging 10.5% in November (-8.7% in October). While the decline is more modest if mobile phones are excluded, at -4.8% in November (-0.2% in October), such sluggishness still suggests the nascent recovery in this sector has flattened out. Ryutaro Kono/ Hiroshi Shiraishi 20 January 2011 Market Mover 29 www.GlobalMarkets.bnpparibas.com
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Economic Calendar: 31 Jan - 25 Feb
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Next Week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2010 20
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Market Coverage Market Economics Pa
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