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Analysts say economy not a top priority for new PM

Former Japanese prime minister Junichiro Koizumi mesmerized foreign investors with his impassioned mantra of reform, but analysts say the economy seems a lower priority for new Prime Minister Shinzo Abe.

Abe has made clear that mending tattered regional ties and revising the Constitution are top of his agenda and looks set to put off unpopular tax rises for as long as possible.

"It is quite obvious that Abe's interest lies with foreign policy and security issues, not the economy," said Hiromichi Shirakawa, chief economist for Japan at investment bank Credit Suisse First Boston.

"His economic reform ideas are quite simple -- to delay tax hikes and in the meantime try to reduce spending," Shirakawa said.

Abe himself was quick to address worries among investors that he may not have the same hunger as Koizumi for overhauling the world's second-largest economy, telling the nation he would continue with structural reform.

Without economic growth, there could be no fiscal reconstruction, the new premier stressed.

Koizumi leaves office still widely popular after setting out to cap public spending, clean up banks' bad debts and break up the post office with its US$3 trillion in assets that were used to bankroll "pork barrel" politics.

Financial markets gave a cautious response to Abe's new team, which, though well versed in economic issues, contains faces largely unknown to foreign investors, the driving force behind the market's sharp rise last year.

"As a whole, the new Cabinet seems lackluster, particularly in the eyes of overseas investors," said Mitsushige Akino, the chief fund manager at Ichiyoshi Investment Management.

Yet while Abe himself is focused on foreign policy, there are signs that his ministers will carry the torch of reform for him, analysts said. Hiroko Ota, the new minister of economy and fiscal policy, vowed to tackle social welfare reform as she took over from veteran Kaoru Yosano, a staunch advocate of reform who was dumped by Abe.

Her appointment "suggests the new administration will keep on the reform path," said Taro Saito, senior economist at NLI Research Institute.

"But whether Ota can take strong leadership or not depends on Abe's attitude," he added.

Abe also ditched Sadakazu Tanigaki -- a strong supporter of a sales tax rise -- as finance minister and replaced him with Koji Omi, 73, a former trade ministry bureaucrat and ex-science policy minister.

Hideo Kumano, economist at Dai-ichi Life Research Institute, said the appointments for both key posts had come as a surprise.

"This suggests the new Cabinet will pursue policies in favor of high economic growth and put off plans for a tax increase, at least until after the upper house election in July next year," he said.

Many economists see tax hikes as inevitable to rein in Japan's ballooning national debt which at more than 150 percent of annual economic output is the highest among industrialized countries.

The new Cabinet is also expected to favor low interest rates to aid Japan's economic recovery after over a decade wallowing in deflation, analysts said.

The new economy and fiscal policy minister appears not to favor a quick return to a more normal level of interest rates, said Shirakawa, adding, "Unlike Yosano, Ota may argue that any rate hike should be delayed."

While the Bank of Japan has independence in setting monetary policy, the previous administration, including Abe, had put pressure on it to avoid rushing to raise interest rates as Japan exits deflation.

"The yen is expected to remain weak against the dollar as the new Cabinet is in favour of a low interest rate policy and Mr Abe is more focused on foreign policy than economic policy," said Kazuyuki Kato at Mizuho Trust and Banking.
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