Fisher Capital Management - Japan Elects a New Premier Part 2

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.

Fisher Capital Management - Japan Elects a New Premier Part 2: Instead of deregulation and lower corporate taxes, he envisions

increased employment and consumption through focused

government spending in nursing, medicine and other social welfare

fields. But some economists expressed doubts; they say there is no

guarantee that the positive effect of government spending can

steadily outpace the negative effects of tax hikes.

Kan seems to be open to the idea of raising Japan’s consumption

tax from its current level of 5%, though the approach of the upperhouse

election on July and concerns over a political backlash suggest

caution will be the government’s modus operandi.

“Any rise in the consumption tax rate must be offset by lower levies

on daily goods as well as refunds for low-income households”, he

recently said. But he also hopes to reduce corporate taxes from the

current 40% rate to around 25%, in line with other major countries.

In the foreign exchange market, Kan has earned a reputation as a

weak-yen advocate. “The business community says that a yen in

the mid-90s against the dollar is appropriate, so it would be better

if it weakens a bit further”, he said in January, shortly after becoming

finance minister.

Fisher Capital Management - Japan Elects a New Premier Part 2: Market observers believe that Kan still supports a weaker yen and

that the Japanese currency could depreciate against the US dollar.

Regarding monetary policy, Kan is generally considered an advocate

of inflation-targeting and quantitative easing. As finance minister,

he has put some political pressure on the Bank of Japan (BOJ) to

fight deflation more aggressively, he nudged the BOJ to double a

special bank lending program introduced in December. The bond

market believes Kan is a wise choice to manage the sustainability

of Japan’s government debt.

The DPJ had promised to unveil a long-term plan to improve public

finances. However, “postponement is likely because of the current

political churn, and any real ‘meat’ in the plan will probably not

be disclosed until after the Upper House election” … says Flemming

Nielsen, senior analyst at Danske research.

Kan is a self-made man, ascending into politics after years toiling

in citizen movements and he has a reputation as a quick learner

and a pragmatic politician, with sharp elbows and an aversion to

any criticism.

The country he now leads is facing dire long-term problems that

beg for strong leadership, including a staggering level of public

debt, a stagnant economy, and an ageing population. He has a few

weeks to fix the impression left by nine months of incompetent DPJ

governance.

If he fails, the party will be routed in the elections for the Diet’s

upper house.