No Recovery in Japan’s Economy Until Early 2010   

• Going into 2009, Japan faces a vicious cycle of rapidly slowing corporate activity, rising unemployment, shrinking incomes and further declines in personal spending. This could be Japan’s worst recession since the Showa Depression in the 1920s. Successive stimulus packages announced by the Japanese government may not even be relevant because they do not address the roots of Japan’s problems, i.e., collapsing global demand and a soaring yen.
• This sense of helplessness is behind at least one suggestion that Japan should simply write-off its holdings in US treasuries to “bail-out” the US and moreover invest in US infrastructure projects to avert a surge in the yen to JPY50 or JPY60 per USD and help create demand for US exports. Further, the surging yen is a self-created crisis, as repatriation of Japanese overseas investments have already reduced Japan’s holdings of US treasury securities over the past year by USD193.8 billion, or an amount that exceeds the entire holdings of the oil exporting nations which are the fifth-largest holders of US treasuries.
• With Japan already heavily indebted and rapidly aging, the only way out of this recession is a combination of a global recovery and yet another round of deep, pervasive restructuring and consolidation to reduce excess domestic capacity and restore global competitiveness. Unfortunately, the ruling LDP is now too fractured to lead Japan out of this crisis, and it is highly likely the crisis will be the coup de grace for this outdated, inbred political party?clearing the way for a younger generation of politicians with new ideas and a penchant for much-needed change.
• Japanese stock prices however could maintain the current upside bias in supported by individual investors and domestic pension funds. Moreover, there is room for a trade-able “economic countermeasures” rally before summer of 2009. However, domestic niche companies with no/minimal global risk and lower foreign investor exposure, including JASDAQ-traded companies, should be the better performers until the global economy begins to recover and the yen backs off of historical highs.

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