Reports from the government and the central bank show that the Japanese economy is on a downward path. Because of fund shortages, the size of the economic packages that the Democratic Party of Japan government decided on in October and November was too small to be effective.

The upcoming Liberal Democratic Party government should work out a meaningful economic package that will help stimulate the economy. But it should be careful with the LDP’s call for the Bank of Japan to adopt unlimited monetary easing and to buy all construction bonds issued by the government. The possible undesirable side effects of these measures include rises in long-term interest rates and inflation not accompanied by investment that expands job opportunities and increases wages.

The Cabinet Office reported Dec. 10 that gross domestic product for the April-June period decreased by an annualized 0.1 percent from the previous quarter, down from the preliminary report of a 0.3 percent increase. GDP for the July-September period fell by an annualized 3.5 percent, the same as the preliminary figure.

The BOJ’s tankan business survey for December, whose results were released Dec. 14, showed that the diffusion index for major manufacturers stood at minus 12, nine points down from the DI in the survey for September. This represented the second straight quarterly drop.

The December figure is worse than the minus 9 that was reported in the tankan survey of June 2011 after the 3/11 disasters and compares with the minus 14 that was reported in the March 2010 survey. The DI is derived by subtracting the percentage of enterprises optimistic about their business outlook from the percentage of enterprises pessimistic about their business outlook.

The chilling of bilateral ties between Japan and China negatively impacted Japan’s economy, which is also suffering from global economic slowdowns due to the sovereign debt crisis in Europe.

Meanwhile, boycotts in the Chinese market and the end to government subsidies for the purchase of eco-friendly cars severely hit automakers. Their DI plummeted by 28 points from the September survey to minus 9 — the steepest drop among the 28 types of industries covered by the survey.

The government should pay close attention to the fact that Japan has suffered a trade deficit of ¥6.28 trillion in the January-November period, already topping the past annual record deficit of ¥2.61 trillion in 1980.

One surprise in the tankan survey is that the DI of major manufacturers for three months later was minus 10, an increase of two points. Capital investment for all industries reportedly will increase 7.1 percent in fiscal 2012 from the previous year.

Still, the government should be aware of downward risks such as the ongoing boycott of Japanese products in China, Europe’s sovereign debt crisis and the United States’ fiscal cliff. The new administration must nurture new growth areas to provide long-term stability for the Japanese economy.

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