After ten years of crisis the Japanese economy has got back on its feet again and, with a third year of growth in a row, received another push in 2005. The mood of confidence is sustained by significantly increased company profits in industry, lively investment activity, newly restored confidence among foreign investors in the future of Japan’s economy and technology, and, last but not least, the gradual fall in unemployment.

The convincing victory of the ruling Liberal Democratic Party (LDP) in the parliamentary elections in September 2005 was first of all a personal triumph for the unusually popular prime minister Koizumi. At the same time, the voters gave him a strong mandate to continue his reform policy which Koizumi has pushed through against considerable resistance from within his own party.

The readiness of Japanese voters to switch allegiance makes the outcome of the September election something of a political window of opportunity, particularly since the most painful reforms lie ahead. The greatest challenges arise from the enormous national debt and demographic developments which threaten to overwhelm the health and pension system. Social cohesion will also be jeopardized by the deregulation of the labor market which under the new circumstances divides society into winners and losers.