A showdown between Japanese Prime Minister Naoto Kan and the contender for his job threatens to erode confidence in Japan’s ability to address a faltering economy and the world’s largest debt, analysts say.
Kan faces controversial veteran powerbroker Ichiro Ozawa in the Sept. 14 vote to select the ruling party leader. If Kan loses, Japan would see its sixth prime minister in four years.
Such revolving-door leadership has chipped away at the country’s international credibility and raised doubts about its ability to make long-term plans to fix its finances, analysts say.
Defeat for Kan would yet again alter economic policy in a nation saddled by slowing growth, deflation, a strong yen and weak domestic demand.
Ratings agency Standard & Poor’s warned recently that frequent leadership change “makes it difficult to have confidence in any long-term fiscal rehabilitation programs” for Japan to put its house in order.
Kan’s government has focused on ending deflation and cutting the industrialized world’s biggest public debt, at almost 200 percent of GDP, and has suggested doubling consumption tax and cutting spending to do so.
In contrast, Ozawa has opposed raising taxes before the next general election and says the ruling Democratic Party of Japan should see its spending promises through.
A brusque and gruff old-school campaigner, Ozawa is aiming to step away from his backroom “shadow shogun” reputation despite a series of damaging funding scandals.
Fears remain that his victory would split the party and add to Japan’s debt mountain through costly consumption-lifting measures, sending bond yields higher recently.
“The bond market swayed under the shadow of Ozawa,” the Nikkei Shimbun said in an editorial on Friday.
“The market has started ringing the siren that Mr Ozawa’s economic policies could bloat fiscal debts ... the Japanese economy could topple, if the long-term interest rate rises on Mr Ozawa’s entrance,” the Nikkei said.
With about 95 percent of outstanding government debt owned by Japanese investors, who are deemed unlikely to dump their holdings en masse, analysts say Japan has time to avoid a public debt crisis if it acts soon.
However, any sudden rise in borrowing costs could threaten a Greek-style risk of default.
“Everyone knows the Japanese economy and fiscal conditions are at crisis level,” said Hidehiko Fujii, chief economist at Japan Research Institute.
“Ozawa has offered no details about his plans, making investors nervous and wanting to avoid risk, leaving the bond market,” Fujii said.
Yet fears over Ozawa’s fiscal vision are matched by frustration over the Kan administration’s inability to tame the yen.
Victory for Ozawa is deemed possible.
“The market has been sending a signal that it’s not good for Kan to continue governing,” said Susumu Kato, chief economist at Credit Agricole Corporate and Investment Bank.
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