Junichiro Koizumi won a vote to become Japan's new prime minister with a slogan promising change. Anyone who thinks that means he can reverse the yen's 13 percent slide in the past year may want to think again.
Koizumi pledged to cut government bond sales, a move that would stop a decades-long increase in borrowing that left Japan with the world's biggest debt. He promised to sell the postal system, which may free up money to invest in companies. The yen rose 3 percent in April, buoyed by his "Change Japan" slogan.
PHOTO: AFP
So far, the only changes have been in Koizumi himself, as he shows signs of compromising on campaign pledges. Investors say he may water down his policies to win support of rivals within his Liberal Democratic Party, who argue the economy isn't ready to stomach such painful medicine.
Koizumi's failure to keep campaign promises would be "a nightmare," said Michael Lockrow, an economist at Invesco Asset Management Ltd, which handles US$7 billion in Japanese stocks.
"The currency would probably weaken to 150" against the US dollar, from ?122.22 today.
Others are voicing similar concerns. "Koizumi's impact will fade away soon and the yen will resume its descent" next week, said Shingo Funatsuki, head of global foreign exchange at Citibank N. A. in Tokyo. Japan's currency may weaken toward 124 per dollar, he said.
Koizumi, elected party leader yesterday and due to be named prime minister tomorrow, may need support of party rivals to pass his measures. That gives leverage to party policy chief Shizuka Kamei and other opponents, as their new leader puts meat on his proposals and picks Cabinet members.
It's important "to look at the Cabinet lineup" at the end of the week, said Mitul Kotecha, head of foreign-exchange research at Credit Agricole Indosuez. Koizumi needs his own people to institute change, he said.
The Cabinet member traders and investors will watch closest will be the replacement for Kiichi Miyazawa as finance minister.
One candidate under consideration is lawmaker Koichi Kato, who led a failed rebellion against outgoing prime minister Yoshiro Mori in November, Jiji News reported.
The minister, who Koizumi will appoint tomorrow, needs to show a meeting of the Group of Seven industrialized nations this weekend that Japan is taking steps to implement the premier's campaign promises.
Whoever replaces Miyazawa would have less experience in politics than the 81-year-old Miyazawa, who was prime minister from 1991 to 1993, and has been finance minister for four heads of government.
Any missteps, and "the yen will plunge," Citibank's Funatsuki said.
Besides facing political challenges, Koizumi also has to explain how he's going to pay for his plan to cut bond sales.
He has called on the government to keep annual debt sales below ?30 trillion (US$244 billion), versus ?34.6 trillion in the fiscal year ended March 31.
That proposal probably isn't realistic, said Yasunari Ueno, a chief economist at Mizuho Securities Co Parliament has already approved the sale of more than ?28 trillion of bonds for the year, so "the possibility of limiting it under ?30 trillion is quite dim," he said.
Borrowing and spending may be the only way to keep the economy, which grew 0.7 percent in the fourth quarter after contracting in the third, from a falling into a tailspin, analysts said.
Party rivals Kamei and Ryutaro Hashimoto both favor borrowing more in the bond market, mindful that a recession may cost them votes in a July election.
Facing those challenges, Koizumi is sounding more like a politician ready to compromise than change.
Asked yesterday if he is considering additional government spending for this year, Koizumi said only that it was too early to say.
While his anti-party-policy statements early in the campaign raised his image as a reformer, recently "Koizumi has started to sound rather more conciliatory on the policy front," said Richard Jerram, a chief economist at ING Barings Securities (Japan) Ltd.
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