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Japanese crisis clouds economic outlook

Pedestrians read a newspaper announcing Japanese Prime Minister Yasuo Fukuda’s resignation in Tokyo on Monday. PHOTO: EPA

Asia’s largest economy was left rudderless again yesterday after Japan’s prime minister quit suddenly, sparking concerns that free-market reforms will be put on a backburner as a recession looms.

There was a weary sense of deja vu on financial markets, as the return of the revolving door politics of the recession-ridden 1990s left the country searching for its third prime minister in less than two years.

Whoever replaces Yasuo Fukuda will inherit the same problems — a deadlocked parliament, a worsening economy, an ageing population and huge public debts.

The Nikkei stock index ended down 1.75 percent while the yen was higher.

“The political uncertainty may add volatility to the market in the short term,” warned Kenichi Kawasaki, chief economist for Lehman Brothers in Tokyo.

“However, we do not expect economic policies to change significantly as a result of a change in the prime minister,” he said, predicting the ruling party could be forced to hold an autumn general election.

Fukuda’s surprise announcement late on Monday came after he failed to reverse a slump in his popularity despite unveiling a major economic stimulus package.

Many investors had already been disillusioned about the prospects for further economic reform given the legislative deadlock and signs that the ruling party is more concerned about the next election.

“There is already political deadlock and elections are expected in the coming year,” said Kazuhiro Takahashi, head of equities at Daiwa Securities SMBC.

Former foreign minister Taro Aso, seen by many as the front-runner to replace Fukuda, would be likely to push for increased government spending to support the economy if he takes office, analysts said.

Aso would “appeal for an increase in budget-spending to support economic activity,” predicted John Richards, head of Asia-Pacific Strategy at RBS Securities.

Until recently, Japan’s economy had been recovering from a slump stretching back more than a decade. But a contraction in the second quarter left the country teetering on the brink of recession.

Some experts said the change of leadership could be positive in the long run if it helps to bring about a realignment of Japanese political forces, with reform-minded politicians taking power.

Fukuda’s resignation “will be a disruption for Japanese politics and markets in the short run, but provide support in the medium to long run,” Morgan Stanley economists wrote in a note to clients.

Reform efforts lost momentum after Junichiro Koizumi stepped down as premier two years ago.

He set out to slash public works spending and break up the post office with its US$3 trillion in assets, which were used to bankroll often wasteful but politically popular public works projects.

The political stalemate has heightened nostalgia on the market for Koizumi, although observers say chances are low he would mount a comeback.
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