Fisher Capital Management - Japan Elects a New Premier Part 1

Fisher Capital Management Eight and a half months after riding the Democratic Party of Japan’s

(DPJ) historic lower house victory into office, Prime Minister Yukio

Hatoyama announced his resignation, having haphazardly frittered

away a chest brimming with political capital.

Major newspapers said that Hatoyama was resigning mainly for

two reasons: his failure to keep his promise to relocate the functions

of US Marine Corps Air Station Futenma, Okinawa, out of Okinawa

Prefecture, and a political funding scandal that included his mother’s

provision of some ¥1.26 billion to him over years.

Following Hatoyama’s resignation, Minister of Finance Naoto Kan

was elected as the new Prime Minister, the fifth in four years.

At his inaugural press conference Kan proposed a comprehensive

reconstruction of the economy, public finance, and social security

as his priority, in addition to reforming public administration, and

conducting responsible diplomatic and defence policy.

Fisher Capital Management Report- Japan Elects a New Premier Part 1: The biggest question surrounding the once-popular new government

is whether Kan can really turn over a new leaf for the DPJ. In his

first policy speech to the Diet as prime minister, Kan sought to set

his administration apart from the previous one by vowing to build

“a strong economy, strong finances and strong social welfare”.

Kan stressed the need to jolt Japan out of its currently weak state,

which he attributed to “anaemic economic growth, ballooning

public debt and dwindling public trust in the viability of Japan's

social security system”.

Observers and practitioners believe that the government is unlikely

to announce any significant new policy initiatives, as Kan was

already one of the main architects behind the previous

administration’s economic policy, although some changes have just

been announced in the DPJ election manifesto for the Upper House

election. For instance it drops the promise of doubling monthly

child allowances to ¥26000 next year.

“I hope to carry over the torch of rebuilding Japan passed on to

me by Hatoyama”, he observed at a press conference after his

election. Alan Feldman, chief economist at Morgan Stanley in Japan,

says that “although Kan’s initial speech did include some new

elements, the main message was continuity with Hatoyama’s

economic policies. Investors are likely to welcome the innovations,

but to remain sceptical of the overall philosophy”.

However, economists believe Kan will face a mountain of challenges

both at home and abroad in the near future. First, he needs to

rebuild that political capital ahead of the upper house elections.

Public support for the DPJ has recovered sharply after his

appointment suggesting that voters have, for now, forgiven the

ruling Democrats for the previous leaders’ policy mistakes.

But it remains to be seen whether the initial popularity of the Kan

administration will translate into a strong performance, and whether

Kan will ultimately be given a strong enough mandate to push

through difficult policy decisions.

Major newspaper polls give Prime Minister approval ratings of

between 60 and 70 percent; but such ratings can be very fickle.

The election will be an uphill battle for the DPJ. The DPJ is without

one of its coalition partners, the Social Democratic Party who left

the ruling camp over Hatoyama’s failure to remove the US base

from Okinawa, as demanded by its leader, Mizuho Fukushima.

The two parties that remain, the DPJ and the People’s New Party,

hold 122 of the upper house’s 242 seats, the slimmest majority

possible. Should the coalition lose that majority in the coming

election, it would mean a split Diet — its majority would only

remain in the lower house. And that would make passing bills

extremely difficult.

Fisher Capital Management Report- Japan Elects a New Premier Part 1: Kan will have plenty on the economic front too. In terms of fiscal

policy, as a former Finance minister he has turned into a fiscal

conservative, having been a champion of funnelling revenue from

higher taxes toward government spending in order to achieve

economic growth. “Economic growth, fiscal reconstruction and

social welfare reform will be achieved together”, he told reporters.