The failure of the ruling Liberal Democratic Party (LDP) to perform well in the election to the upper house of parliament on July 29th suggests that Japanese politics has entered a new phase of volatility and that the beleaguered prime minister, Shinzo Abe, may well yet prove to be its first casualty. The next lower house election is due by September 2009, but is more likely to be held in 2008. Both the LDP and the opposition Democratic Party of Japan could have new leaders before then, and although the LDP is destined to lose many of the seats that it won in its landslide victory in 2005, it is likely to remain the largest party. Monetary policy will continue to be tightened during the forecast period, albeit less aggressively than previously forecast. The current economic expansion will moderate, with GDP growth slowing to 1.9% in 2008 and 1.6% in 2009, following estimated growth of 2.3% in 2007. The yen will strengthen steadily against the US dollar in 2008-09. Consumer prices will rise by 0.5% in 2008 and 0.8% in 2009, while the current-account surplus will stabilise around 4.6% of GDP.