Japan’s next leader must move quickly to prevent pressing debt and deflation-fighting reforms being delayed by political turmoil following Japanese Prime Minister Yukio Hatoyama’s resignation, analysts say.
Japanese finance minister Naoto Kan is seen as the frontrunner to replace Hatoyama, so the prospect of one of Japan’s leading anti-deflation voices taking charge may generate hopes for a stronger recovery in the world’s No. 2 economy. However, there is concern the departure of Hatoyama less than a year after his sweeping election victory may hit market confidence and trigger fears of further delays to reforms to fight deflation and reduce Japan’s huge debt.
“Foreign investors will be disappointed and that would create a negative impact on the market,” Calyon Securities analyst Susumu Kato said.
“Investors may conclude that Japanese politics will never change despite the DPJ [Democratic Party of Japan] achieving an historic victory last year,” he said. “Political uncertainties would delay reforms of the economy, which would also discourage investors.”
Pressure is building on the government and central bank ahead of next month’s upper house elections to combat falling prices and reduce Japan’s soaring public debt, soon to exceed 200 percent of GDP. Two decades of heavy stimulus and falling tax revenues have given Japan a public debt mountain bigger than any other industrialized nation.
“Any political stalemate would delay procedures in legislation and other political initiatives, which will eventually affect the real economy,” Kato said.
With around 95 percent of the debt held by domestic investors, Japan has enjoyed low interest on its borrowing as private-sector savings have kept the nation afloat since its stock market crashed in 1990.
But analysts warn that any hike in borrowing costs could see the uneasy status quo unravel. In recent weeks, the IMF and the Organisation for Economic Co-operation and Development have both called on Japan to take clear and decisive action to reduce its debt.
Some see Hatoyama’s resignation — he is Japan’s fourth leader to quit in four years — as a positive for stocks, given his efforts to slash greenhouse-gas emissions and boost the minimum wage for temporary workers, moves that have not endeared him to Japan Inc.
“Hatoyama’s resignation and the prospect of new leadership is likely to be welcomed by the market,” Mizuho Investors Securities strategist Masatoshi Sato said.
Japanese stocks saw volatile trade yesterday, rallying on news of the resignation but slumping 1.43 percent in the afternoon session. The yen fell, with its safe-haven status temporarily diminished by the political instability. Tokyo Forex & Ueda Harlow currency manager Yuzo Sakai told Dow Jones Newswires that the damage to the yen was likely to be limited, as investors had already priced in Hatoyama’s resignation, owing to media speculation this week.
Hatoyama’s fate was sealed after he reneged on an election promise to move a controversial US airbase off Okinawa island, with the small Social Democratic Party quitting his ruling coalition in protest on the weekend.
His replacement will not be elected until Friday. Kan, the fiscal conservative widely tipped to replace him, supports a weaker yen, which benefits exporters, and has often warned about the dangers of Japan’s crippling deflation, heaping pressure on the Bank of Japan to take action on falling prices.
“In terms of continuity, Kan’s succession is likely to be accepted favorably, at least at home,” Kato said.
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