Political instability

Another factor is Japan’s political structure, which is so closely tied to its economy. A political shake-up at the helm of the Japanese government has injected uncertainty into the economic arena, including much-needed fiscal reforms. In mid-September Japanese Prime Minister Shinzo Abe of the Liberal Democratic Party (LDP) was forced to resign in the wake of his party’s devastating loss in upper house elections. However, the new Prime Minister, Yasuo Fukuda, has already lost popularity. A late-October poll by Mainichi Shimbun revealed public support for the new Prime Minister had dropped to only 46 percent, down 10 percentage points from the previous month, just after he had assumed office.

“Fukuda will face the challenges that bedeviled his immediate predecessor — how to move the economy and growth forward, beat deflation, and curb the recent explosion in public debt, which has reached a point where it will represent a significant burden to future generations,” says Matt Robinson, economist at Moody’s Economy.com in Sydney, Australia. ”Addressing the government’s budget deficits will require reining in public spending and also reforming the taxation system, including raising consumption taxes.”

Some analysts expressed concern the new Prime Minister may actually be a step backward for the country.

“I worry he is a member of the old school,” says Tony Hughes, managing director of credit risk at Moody’s Economy.com in Pennsylvania. “He has been a minister in LDP government and his father was also an LDP prime minister. There are all these symbolic ties to the old school.”

Japan is known for its extensive system of patronage and backroom deals, which analysts say have included many “bridges to nowhere” — porkbarrel spending designed give political allies lucrative, but unnecessary, public works and business ventures.

“There is a desperate need for reform,” says Hughes. “Japan is increasingly being run by old guys in suits who represent the old politics. I don’t feel confident the problems they encountered in the 80s and 90s will be overcome.”