Will Politics Save Japan's Economy?

This week I focus on Japan, which will not only underperform the U.S. and E.U. economically in 2009, but also faces political uncertainty. National elections, scheduled for the end of August, are quite likely to bring some changes to Japanese economic policy and could also hold ramifications for the U.S. dollar.

I expect the pace of the Japanese economic contraction to ease from the sharp decline of first-quarter 2009, but the road to recovery will be long and bumpy. Inventory restocking is coming to an end, and rising commodity prices could curtail a nascent recovery in consumer demand. Meanwhile, public spending is constrained by soaring public debt, and Japan's export-oriented model of growth seems increasingly unsustainable, given the degree to which deleveraging is stifling external demand from the U.S. and Europe.