The resignation of Japan's Prime Minister Yukio Hatoyama on June 2 followed the resignation of his Cabinet en masse on June 4. The premier's demise was due to plunging approval ratings over broken campaign promises to move the US Marine Corps Airbase off Okinawa, as well as corruption scandals and pressure from the Social Democratic Party (SDP) that had withdrawn from the ruling coalition government just days earlier.
The decision by Mr. Hatoyama to step down should not affect the Japanese economy much because newly-elected Prime Minister Naoto Kan had previously served as the finance minister under Mr. Hatoyama. The continuation of their existing policies should remain intact because Mr. Kan is also a member of the Democratic Party of Japan (DPJ). However, it is expected that the new Cabinet will face a host of daunting tasks ahead toward reviving the nation's stagnant economy.
At present, Japan's economy is recovering somewhat, as indicated by growth in their GDP. In 1Q10, Japan's GDP grew 4.6 percent YoY, which was the highest rate seen in more than 12 years, driven partly by exports, Japan's primary growth engine. Japan's exports began to pick up in 4Q09 and that momentum continued into 4M10. In April, 2010, the value of Japan's exports surged more than 40 percent YoY – rising for a fourth straight month – thus helping to boost their import requirements.
However, the incoming government will face a number of economic risks. One of those will be persistent deflation, wherein Japan's Consumer Price Index fell 1.2 percent YoY in April, representing the 14th straight month of decline. Deflation in Japan has been driven by ebbing consumer spending since 2009 as a result of the economic crisis that incurred surging unemployment. Such deflationary pressure, however, has shown some signs of easing due to improved consumer confidence beginning in 2Q09 to 4M10. In this incident, even if Japan is facing higher unemployment and ebbing consumption, better consumer confidence offers some hope, whereas in 1Q09, their economy was grappling with the worst economic sentiment.
The second risk is the country's high debt-to-GDP ratio amid falling tax receipts, because the proportion of working population is shrinking. Mounting public debt has gradually weakened Japan's fiscal position, and that is set to be exacerbated by lower yields on Japanese government bonds that are not attractive enough to encourage foreign investors. As a result, this will make it increasingly difficult for the new government to secure sufficient funding to finance their expenditures to aid in a continuing recovery.
The third risk is that Japan's exports to the EU will be under pressure as the Yen is trending stronger against the Euro due to the Greek debt crisis that has sent investors into the safe-haven Yen and out of the Euro. The Yen's appreciation may put a dent on Japan's exports to EU over the remainder of 2010. Nevertheless, that should not affect the overall value of Japan's exports much because shipments to the US should perform well consistent with the economic recovery there, and the value of the Yen against the greenback has not changed much since the beginning of this year.
As for Thailand, the Yen's appreciation versus the Euro over the rest of this year may affect Thai exports to Japan, particularly of raw materials and intermediate components used in automobile production, as well as in machinery and electrical appliances intended for export to the EU. Similar effects will be felt among exports of capital goods including computers, electrical circuit boards, automobiles, machinery, iron & steel products, electrical appliances, rubber products (such as auto-tires), as well as related accessories and components for the above.
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