Fisher Capital Management - Japan Elects a New Premier Part 2

Fisher Capital Management Eight and a half months after riding the Democratic Party of Japan’s
(DPJ) historic lower house victory into office, Prime Minister Yukio
Hatoyama announced his resignation, having haphazardly frittered
away a chest brimming with political capital.

Major newspapers said that Hatoyama was resigning mainly for

two reasons: his failure to keep his promise to relocate the functions
of US Marine Corps Air Station Futenma, Okinawa, out of Okinawa
Prefecture, and a political funding scandal that included his mother’s
provision of some ¥1.26 billion to him over years.

Fisher Capital Management - Japan Elects a New Premier Part 2: Instead of deregulation and lower corporate taxes, he
envisions
increased employment and consumption through focused
government spending in nursing, medicine and other social welfare
fields. But some economists expressed doubts; they say there is no
guarantee that the positive effect of government spending can
steadily outpace the negative effects of tax hikes.

Kan seems to be open to the idea of raising Japan’s consumption

tax from its current level of 5%, though the approach of the upperhouse
election on July and concerns over a political backlash suggest
caution will be the government’s modus operandi.

“Any rise in the consumption tax rate must be offset by lower levies
on daily goods as well as refunds for low-income households”, he
recently said. But he also hopes to reduce corporate taxes from the
current 40% rate to around 25%, in line with other major countries.
In the foreign exchange market, Kan has earned a reputation as a
weak-yen advocate. “The business community says that a yen in
the mid-90s against the dollar is appropriate, so it would be better
if it weakens a bit further”, he said in January, shortly after becoming
finance minister.

Fisher Capital Management - Japan Elects a New Premier Part 2: Market observers believe that Kan still supports a
weaker yen and
that the Japanese currency could depreciate against the US dollar.
Regarding monetary policy, Kan is generally considered an advocate
of inflation-targeting and quantitative easing. As finance minister,
he has put some political pressure on the Bank of Japan (BOJ) to
fight deflation more aggressively, he nudged the BOJ to double a
special bank lending program introduced in December. The bond
market believes Kan is a wise choice to manage the sustainability
of Japan’s government debt.

The DPJ had promised to unveil a long-term plan to improve public

finances. However, “postponement is likely because of the current
political churn, and any real ‘meat’ in the plan will probably not
be disclosed until after the Upper House election” … says Flemming
Nielsen, senior analyst at Danske research.

Kan is a self-made man, ascending into politics after years toiling

in citizen movements and he has a reputation as a quick learner
and a pragmatic politician, with sharp elbows and an aversion to
any criticism.
The country he now leads is facing dire long-term problems that
beg for strong leadership, including a staggering level of public
debt, a stagnant economy, and an ageing population. He has a few
weeks to fix the impression left by nine months of incompetent DPJ
governance.

If he fails, the party will be routed in the elections for the Diet’s
upper house.