The landmark victory of the DPJ in 2009 promised a fresh start after five decades of the LDP political dominance. But the party failed to live up to expectations, and went down to defeat at an early election that was held in December 2012 against a backdrop of growing economic pessimism. The LDP’s victory capped a remarkable political comeback for Shinzo Abe.

Abe, who had a short stint as prime minister in 2006-2007, is remembered mostly as a period of deteriorating relations with Japan’s neighbors. He has recast himself as a determined reformer who has staked his political future on ending two decades of economic stagnation.

Dubbed by observers as “Abenomics,” the prime minister’s three-pronged policy program consists of:

  1. Aggressive monetary easing to combat deflation,
  2. A fresh fiscal stimulus package to boost economic growth, and 
  3. Reforms designed to encourage private investment and boost the competitiveness of exporters.

In truth, only the last of the three prongs marks a significant departure from the LDP’s traditional approach. And given the LDP’s close links to powerful vested interests, considerable skepticism remains as to Abe’s ability to push through structural reforms.

Real GDP growth is forecast to come in slightly above 1 percent this year.

Moreover, despite a solid mandate and a veto-proof majority in the lower house of the Diet, the window of opportunity will be narrow, as LDP heavyweights will lose whatever appetite for substantial change they may have if, as is likely, the party wins the Senate elections in mid-2013.

The $116 billion stimulus package unveiled in January should be enough to ensure positive economic growth in 2013. However, the government’s forecast that fiscal expansion will boost real GDP growth by two full percentage points will not be borne out in the absence of a significant improvement in export performance, which is unlikely.

Real GDP growth is forecast to come in slightly above 1 percent this year, while the current account surplus will continue to narrow, the result of a further widening of the trade deficit.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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