Japan's New Ruling Party: A Necessary Change?

Robert Hsu, September 08, 2009

Change. It seems to be a hot topic this year, as nations around the world struggle to pull their economies from the worst financial and economic crisis since the Great Depression. Countries around the globe are looking for ways to recover from this crisis, and in many cases, their citizens feel its time for a change in government.

Just last week, Japan's Liberal Democratic Party (LDP) -- which has held power in the country for more than 50 years -- was defeated in Japan's most recent election. The LDP suffered defeat at the hands of the opposition Democratic Party of Japan (DPJ), losing nearly two-thirds of the Japanese Parliament seats.

The call for change was a powerful one this election, and the motley alliance of non-mainstream groups that make up the DPJ are now in power. Unfortunately, the DPJ doesn't really have a clear political platform or plan besides "change." And, though popular with voters, it lacks real experience in governance. As a result, I think the DPJ has a long way to go to deliver on its promises and to address the existing problems in Japan.

We've discussed these problems before but to recap, the country has been suffering from deflation stagnation for almost 20 years. And as more Japanese retire than enter the workforce, this aging demographic has only prolonged its recent recession. This is a vicious cycle that is shrinking the job market and economic growth. Sure, we've seen recent economic data released that Japan may be heading out of the worst recession the country has seen since World War II, but it is likely the recovery there will be slow and certainly not guaranteed.

And this new ruling party will be held accountable for pulling Japan from the economic crisis and dealing with its elderly population, record unemployment, deflation and high government debt.

So despite the positive improvements in the Japanese economy, I think the economic picture in Japan will grow worse before it grows better. Especially since the current recovery in Japan has been mostly supported by stimulus spending that is in danger of expiring or adjusting with the change in government.

And because of the dismal outlook for Japan's economy through the end of the year and into 2010, I remain convinced that we continue to avoid going long on investments there. In fact, I recently recommended that my Asia Edge subscribers short Japan's notorious export industrial sector, since one of the DPJ's main goals is to reduce support for this industry. That doesn't bode well for Japan's export sector -- or the country's economy as a whole.

So to profit, even despite this dismal economic picture for Japan, my Asia Edge readers are shorting a global electronics giant in Japan. This company has fallen behind the competition in recent years, and with the DPJ's limited focus on the export sector, I think this company's shares are headed lower.

Learn how you can take advantage of this opportunity, too!