Japanese Prime Minister Naoto Kan and rival Ichiro Ozawa clashed over fiscal priorities yesterday in a battle for party leadership that threatens a policy vacuum as Japan struggles to tackle a strong yen and weak economy.
The strife in the Democratic Party of Japan (DPJ), which swept to power a year ago promising change, underscores a policy rift that could derail Kan’s efforts to curb a public debt already twice the size of the US$5 trillion economy.
It also coincides with a rise in the yen that threatens Japan’s fragile recovery. A Bank of Japan decision on Monday to boost a cheap loan scheme did little to weaken the currency, hovering near a 15-year high against the dollar hit last week.
In a platform released after registering for the Sept. 14 DPJ leadership vote, Kan said he would consider drastic tax reforms including Japan’s 5 percent sales tax.
“I will tackle fiscal consolidation without running away,” Kan said in the statement.
Ozawa, in contrast, said he would cut waste drastically to fund party pledges aimed at putting more cash in consumers’ hands, and vowed to take all possible steps, including market intervention, to cope with rapid rises in the yen.
“We need to cut wasteful spending before debating a sales tax hike, and use the revenues to implement policies we’ve promised. This has been what we promised to the public,” Ozawa told a joint news conference with the prime minister.
The yen dipped a little after Ozawa’s policy statement on intervention, with the US dollar hitting the day’s high of ¥84.58 following that. However, the US currency later trimmed some gains to stand at ¥84.46, up 0.3 percent on the day.
“The big issue is that during this [election] period, there risks being a political vacuum that could hamper policy-making, possibly encouraging speculators to sell the Nikkei,” said Hideyuki Ishiguro, a strategist at Okasan Securities.
A solid Kan victory would strengthen the prime minister’s control over policy, but at present the race is too close to call.
“If Kan does get a big vote, I suppose he could be more aggressive, but I’d say the chances of that are not as great as the chances of the party imploding,” said Jeffrey Kingston, director of Asian studies at Temple University in Tokyo.
Ozawa’s propensity for spending has been welcomed by some financial market players worried about Japan’s faltering economy, but would also exacerbate concerns about mounting debt and so steepen the yield curve for Japanese government bonds.
“It could be positive over the short term,” Yutaka Miura, a senior technical analyst at Mizuho Securities, said of an Ozawa win. “But over the mid- and longer-term it’d be negative, since there’d be more worries about an increase in debt.”
The winner of the party race will likely become prime minister by virtue of the Democrats’ majority in parliament’s lower house.
Kan is already Japan’s fifth leader in three years, and if he loses, the country could end up with its third prime minister in one year — one reason a majority of voters favor Kan staying on.
Ozawa has criticized Kan for floating a possible rise in the sales tax ahead of a July upper house election that cost the ruling bloc its majority in the chamber, forcing the Democrats to seek opposition help to pass bills.
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