For a brief time under the Koizumi Administrations, it appeared that the Japanese government at last got the joke, i.e., that full-scale reforms were required to restore Japan’s economy to a sustainable growth path.

As pointed out by fellow Seeking Alpha blogger Clive Corcoran ("On the Nikkei's Break Below Key Negative Levels"), Japan's Nikkei 225 last week broke below two major support levels, completing a move below all three key moving average levels with a close below the 200 day EMA. The most pressure is coming from domestic institutional investors, who have dumped over JPY1 trillion of Japanese stocks since July, almost completely offsetting the JPY1.45 trillion of net buying by foreigners, who have turned net sellers in the last couple of weeks.

1. Naoto Kan, deputy prime minister and state minister in charge of national strategy, economic and fiscal policy. With his experience fighting bureaucrats as an opposition politician, Mr. Kan is considered a good choice for the planned National Strategy Bureau, which will oversee policies and the budget.
2. Hirohisa Fujii, minister of finance. Mr. Fujii is a recognized expert on the national budget and tax issues, and was the finance minister for the Hosokawa and Hata administrations from 1993 to 1994. His knowledge of the national budget and his connections in the Ministry of Finance will be important in achieving a smooth transistion for the budget formation process from finance ministry bureaucrats to the DPJ.
3. Akira "Mr. Nenkin" Nagatsuma, minister of health, labor and welfare (MHLW). Mr. Nagatsume is energetically committed to administrative reform, and has been a sourge of the bloated Social Insurance Agency. The MHLW in particular is ripe for administrative reform, but Mr. Nagatsuma will have to successfully deal with the powerful doctor's lobby.
4. Seiji Maehara, minister of land, infrastructure, transport and tourism (MLITT). Mr. Maehara has also been a vocal critic of the "amakudari" practice of ex-senior bureaucrats landing cushy jobs in government-sponsored corporations, as well as the historical waste in public works expenditures. His challenge will be to clean up 50 years of collusion and pork-barrel politics in public works construction.
5. Yoshito Sengoku, state minister in charge of administrative reform. Mr. Sengoku's predecessors in the LDP, such as Yoshimi Watanabe, resigned in disgust and frustration after running into brick wall after brick wall in LDP-led regimes. Prior state ministers in charge of administrativve reform even in the Koizumi Cabinet also encountered fierce resistance to administrative reforms.

Mr. Kan will be in charge of forming the National Strateg Bureau (NSB), which is tasked with crafting key national policies including budget guidelines and a basis for a new foreign policy. It will replace the LDP's Council on Economic and Fiscal Policy, which was headed by the prime minister, and should be similar in function to the US Office of Management and Budget (OMB), although very likely a lot smaller in terms of staffing. The NSB will be a bellwether indicating how successful the DJP will be in reducing the role of Japan's powerful bureaucracy to "experts on tap but not on top".

Unlike the US, where the Congress has the authority to formulate the national budget, the authority in Japan is the Prime Minister’s cabinet. Consequently, the DPJ has quickly put the FY2010 budget process on hold until they can get their Cabinet together and issue new budget instructions to the various ministries and the MOF.

Thus the DPJ now has the majority in both houses of Japan's Diet, and Japan's fiscal stimulus focus is now expected to shift from "concrete to people", i.e., more direct support for people's livelihood rather than wasteful public works spending.

Recent voter surveys by the Asahi Newspaper and the Nikkei (Japan Economic Journal) are now predicting a landslide victory for the Democratic Party of Japan (DPJ, Japan's equivalent of the Democrats in the US) over the Liberal Democratic Party (LDP, Japan's equivalent of the Republicans), which has ruled Japan for all but a couple of weeks since the end of World War II.

Yet Japanese stock prices fell on the news, as investors, a) had already discounted good Q2 GDP numbers and b) were more concerned about the weak US consumer sentiment numbers and the stronger yen. In other words, US economic numbers and perceptions thereof are having a bigger impact on investor sentiment for Japanese stocks.

Could Japan recover earlier than the U.S.? Not likely. These upgrades merely reflect the view that "the pace of deterioration has slowed". Data from the Cabinet Office implied the recession will continue for months to come, with companies delaying outlays on new plants and equipment. A leading indicator of core capital expenditures, core machinery orders, fell 3.0% in May from April, and much more than the consensus, which was for a 2.0% rise. Further, as the following charts show, the "improvement" seen so far is little more than a dead cat bounce.

Thereafter, over 40 J-REITs were listed, and the Tokyo J-REIT index soared from 1,000.00 at its inauguration in March 31, 2003, to a May 2007 high of 2,592.16, representing a nice 2.6-fold gain over a four year period. But Japan's J-REIT market has since fallen on hard times, very hard times. Since the global financial crisis erupted following the failure of Lehman Brothers in September 2008, J-REITs have been struggling to hold on to purchased properties, let along acquire new ones. The rapid-fire failures of many newly emerged real estate developers who were J-REIT sponsors and the first bankruptcy of J-REITs themselves caused serious balance sheet and liquidity concerns. Consequently, the Tokyo Stock Exchange's J-REIT index plunged from the May 2007 high to a February 2009 low of 720.96, or 72.2% lower than the historical peak just two years earlier.

As any experienced investor is aware, an ADR is actually a "warehouse" receipt representing ownership in the underlying shares of a foreign company. When you buy an ADR, you don't technically own the foreign stock directly, you own a piece of paper that entitles you to one or more shares of a foreign stock being held on your behalf at a depository bank. But not all ADRs are created equal. In terms of publicly traded ADRs, there are basically four types; a) unsponsored, b) Level I, c) Level II (listed) and Level III (offering).

This loss comes after the company tapped the capital markets last month for a JPY280 billion stock offering to bolster its regulatory capital base in anticipation of such losses. With such losses looming, why anyone subscribed to the offering is beyond me. Japan's Dai-ichi Mutual Life Insurance Co. is now the top shareholder in Nomura after acquiring 100 billion yen in subordinated convertible bonds issued this past December. Dai-ichi Life's interest in Nomura is 8.37% counting the stake that would result if the subordinated bonds are converted into stock. After the subordinated covertible bond issue, the company offered up some 750 million new shares this March to raise roughly JPY300 billion.

The Aso Administration had already announced a new JPY15 trillion stimulus plan that is aimed at boosting GDP growth by 2 percentage points. As the new forecast likely incorporates the boost to GDP from the new stimulus plan, the government was probably looking at minus 5% pre-stimulus plan.

In a similar light, the Nikkei is reporting that the government and ruling coalition (LDP and Komeito) have solidified a plan to buy up to JPY50 trillion of Japanese stocks, mostly through index ETFs--i.e., Japan's very own stock market plunge protection plan. The program, to ostensibly last through March 2012, was included in the JPY15 trillion ($150 billion) stimulus plan announced by Prime Minister Taro Aso on April 10, 2009.

a) Japan will be significantly increasing JGB (government bond) issuance from a total JPY30 trillion to more like JPY43 trillion and exacerbate an already-high debt-to-GDP ratio (approaching 200%) in the process,

The BOJ has taken action every month since October of last year, when the global financial crisis erupted, and has moved increasingly aggressively in using its balance sheet to ensure that the impairment to Japanese bank balance sheets from losses on toxic oversesa asset-backed securities and valuation losses on domestic stock holdings do not choke off the crucial supply of credit for both major as well as medium- and small-sized enterprises. These actions have pushed down short-term rates significantly, with the average yield on three-month commercial paper (CP) dropping to 0.66% in March from 1.48% in November. The Bank have even utilized Japan's forex reserves to provide foreign currency loans to international firms that are having trouble procuring USD financing at other than "distressed" rates.

In the March 2009 BIS Quarterly Review ("The US dollar shortage in global banking"), Patrick McGuire and Goetz von Peter analyze why the USD has strengthened in the face of the global financial crisis. Basically, this strength is a reflection of continued financial system stress.

It is interesting to note that one of the LDP members, Mr. Yoshihide Suga, is deputy chairman of the LDP's election strategy council, which says a lot about what his priorities are regarding such a proposal. Everyone within the LDP, and particularly the younger members, have a sense of crisis regarding the upcoming Lower House elections in September of this year, given Prime Minister Taro Aso's record low voter ratings and the fact that the LDP and the Aso Administration is spinning their wheels on introducing economic countermeasures to fix a Japanese economy that is in serious trouble because of political gridlock.

The BOJ is now looking for modestly positive GDP growth of +/- 1% in 2010, but private sector economists view this as optimistic, leaning instead toward three years of negative growth for Japan's economy.

While firmer markets overseas and the Fed rate cut helped, the market was also boosted by the October 30th announcement by Taro Aso's Cabinet of a second package of economic, stock market and financial countermeasures.