japan460x276The land of the rising sun has seen better days. Their GDP had contracted by 4 percent over the first three months of 2009, the worst quarterly performance on record. Year on year, Japan’s economy has shrunk by more than 15 percent, the steepest such decline in more than half a century. We’ve earlier reported that the Bank of Japan has publicly appeared pessimistic on the nation’s economic outlook. Governor Masaaki Shirakawa himself stated that consumption and investment would remain weak. 

The economic turbulence may be on the verge of curbing. Investors firmly believe that China’s political and economic moves will not only create the global superpower to be reckoned with but lift Asia out of its current malaise. The only obstacle in achieving economic prosperity in Japan would be the political risks which mire progression and productivity. 

Ian Bremmer, President of the Eurasia Group and author of ‘The Fat Tail‘ recently discussed the political paralysis going on in Japan and the risk it leaves to foreign investors.

 

Prime Minister Taro Aso and the ruling Liberal Democratic Party (LDP) have managed to climb their way out of single-digit approval ratings, but numbers in the low 30s still leave the party facing likely defeat in an election that must be called by early September. And the LDP’s recent recovery took place at a time when the unpopular, scandal-ridden, and ailing Ichiro Ozawa still ran the opposition Democratic Party of Japan (DPJ). Now that he’s announced his resignation, public focus will return to the country’s dire economic performance — and the LDP’s inability to turn it around. Recovery is coming, but not fast enough to bail out the ruling party, and Aso has neither the track record nor the temperament to reverse his fortunes as the far more talented Junichiro Koizumi managed to do four years ago.

So what will the next Japanese government look like? When my turn arrived to ask questions of knowledgeable friends in political and business circles, I got some very interesting answers. More than one well-informed source warned me that Japan is about to have a centrist third party, one comprised of disgruntled factions from within the LDP and DPJ. How successful the new party will be is open to question, but the plans are well underway — one of the LDP’s leading politicians and a younger DPJ maverick (referred to as a “rising star” by one official) have been busy raising cash for the new party (to be announced right after elections) from senior Japanese executives.

It’s starting to look like Japanese politicians will be fully occupied with sorting out their new alliances and rivalries over the next couple of years just as China resumes its rise, the Obama administration works to build ties with Japan on new ground, and gradual economic recovery offers opportunities for much-needed structural economic reforms. That’s bad news — for Japan and for its friends in Washington.

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