Instant View: Japan Democrats pick Finmin Kan as next PM

TOKYO (BestGrowthStock) – Japan’s ruling Democratic Party on Friday picked Finance Minister Naoto Kan, a fiscal conservative once best known for battling bureaucrats, as the country’s next prime minister ahead of an upper house election expected next month.

Kan, 63, would become Japan’s fifth prime minister in three years as the country struggles to rein in a huge public debt, spur growth in an aging society and manage ties with security ally Washington and a rising China.

The party swept to power in a historic election last year but saw its ratings slide on doubts over outgoing premier Yukio Hatoyama’s leadership during his brief eight months in office.

KEY POINTS

* Kan’s becoming premier could spell bolder steps ahead to rein in the huge public debt, although he may face opposition from many in his party ahead of the election.

* The Democrats need to win the upper house poll expected on July 11 to avoid more policy paralysis.

* The new leader had been expected to form a new cabinet later the same day, but NHK public TV said Kan had expressed a desire to take more time and might wait until early next week.

MARKET REACTION:

— The yen was steady versus the U.S. dollar after 92.75 yen, little changed from U.S. trade. Kan surprised markets earlier this year by saying he wanted the yen to weaken more to help the country’s exporters.

— Tokyo’s Nikkei share average rose 0.3 percent but quickly surrendered its gains and was down 0.2 percent by 12:30 a.m. ET.

— Japanese government bond futures were also steady.

COMMENTARY

RUIXUE XU, RATES STRATEGIST, RBS SECURITIES, JAPAN

“Kan has spoken out in favor of fiscal consolidation and has also put pressure on the Bank of Japan, so the market’s expectation is that this may lead to additional monetary easing measures from the BOJ. Kan becoming prime minister is a positive factor (for the bond market).

“But the market will want to confirm whether or not he will deviate from his prior stance and whether the government will unveil its medium-term framework and long-term targets for fiscal policy in June as scheduled.”

YOSHIKIYO SHIMAMINE, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO

“Kan taking office will be good for a weaker yen but he is considering raising the consumption tax, which will have a negative impact on the stock market.

“If he fully advocates fiscal reform over a growth strategy, it would be difficult for the government to secure funds for some of the party’s policies such as allowances for families with children.”

KYOHEI MORITA, CHIEF ECONOMIST, BARCLAYS CAPITAL, TOKYO

“Kan talked about the need for the government and the Bank of Japan to work together to beat deflation, but frankly the BOJ has already done what it can. It’s the government that needs to do more. What the government should consider doing is currency intervention to weaken the yen.

“As currency policy is the jurisdiction of the finance minister, Kan as prime minister will be able to say much less about this topic than before. The focus will thus be on who will become the next finance minister.

“Kan will never again mention specific levels of the yen and probably won’t verbally intervene in the currency market. But deep inside, I think he still believes that a weak yen is desirable. I think that’s in his DNA.”

HIROYUKI NAKAI, CHIEF STRATEGIST, TOKAI TOKYO RESEARCH, TOKYO

“The market has already factored this in to some degree, but if Hatoyama had remained, the party would have had a big loss at the election and the political situation would have been chaotic.

“But with Kan in charge now, the sense of stagnation in politics and the economy is receding somewhat, even though much will depend on the make-up of the cabinet. In any case, having far fewer negative factors is good for the market.

“The postal reform bill will probably be scrapped because there just isn’t enough time, and this would spoil the relationship with Shizuka Kamei and his People’s New Party, and would likely lead the People’s New Party to bolt the coalition. So, this will probably be after the election but a new framework for the coalition may be created.

“But it is very much certain that the DPJ will lose at the election. So even with Kan in charge, it would likely be hard to create a new trend, especially when external factors remain the same.”

YUICHI KODAMA, ECONOMIST, MEIJI YASUDA LIFE INSURANCE, TOKYO

“During his stint as finance minister, Kan seemed to have deepened his understanding about monetary and fiscal policies so his becoming prime minister is expected to smooth policymaking on economic and fiscal issues.

“Kan as prime minister is also likely to keep up pressure on the Bank of Japan for additional (policy) easing and he may call for the central bank to purchase more JGBs.

“He is likely to aim to guide the yen lower through additional easing by the BOJ as the government has limited room for implementing further stimulus. The government under Kan may also act more quickly than preceding governments to intervene in the currency market to stem any sharp appreciation in the yen.”

ADRIAN FOSTER, HEAD OF FINANCIAL MARKETS RESEARCH, RABOBANK INTERNATIONAL, HONG KONG

“Kan is likely to continue to jawbone the markets. The dollar has been in a range of 90-95 yen and the medium-term trajectory is up rather than down. Kan favors a weaker yen.

“Globally, things are turning out that way as U.S. economic growth looks better than Japanese economic growth.

“Deflationary pressure is likely to end this year, and I think the BOJ could go on holiday. The government will continue to point to the BOJ from time to time (urging it to take fresh steps to boost the economy), but what can they really do?

“If you look at Japan’s budget deficit, it looks like Portugal. When you look at its current account, it looks more like Germany. As long as there’s a mid-term fiscal plan in place, I don’t think Japan is vulnerable.”

BACKGROUND

— Hatoyama, his voter ratings in tatters, resigned on Wednesday just eight months after the Democrats swept to power pledging to cut waste, wrest control of policy from bureaucrats, and give consumers more cash to stimulate domestic demand.

His abrupt departure has raised concerns among investors that the government will delay efforts to thrash out plans, due out this month, to cut a public debt that is already twice the size of Japan’s GDP and to craft a strategy for sustainable growth. Media surveys showed Hatoyama’s resignation had given the party a boost.

— Japan’s new leader will face a tough task keeping ties with the United States on track, since a deal clinched by Hatoyama with Washington to shift a U.S. airbase to the southern Japan island of Okinawa is staunchly opposed by local residents.

— Kan has in the past pressed the Bank of Japan to do more to fight deflation and has sounded more positive than Hatoyama about raising the 5 percent sales tax in the future to fund bulging social welfare costs. That stance would be welcomed by market players worried about Japan’s debt.

— The Democrats and their remaining small ally, the conservative People’s New Party, still look likely to fall short of a majority in the upper house, meaning they will need to seek new coalition partners to smooth the passage of legislation.

But the Democratic Party-led government still have a majority in the more powerful lower house.

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Instant View: Japan Democrats pick Finmin Kan as next PM