Instant View: Kan wins Japan ruling party leadership vote

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan defeated powerbroker Ichiro Ozawa in a party leadership vote on Tuesday, but now must try to unify the party while coping with a strong yen, weak economy, big public debt and divided parliament.

KEY POINTS:

* Kan won with 721 out of 1,212 points in what had been expected to be a cliffhanger vote.

* Kan won narrowly among members of parliament but scored a more convincing margin among local lawmakers and the party rank-and-file.

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COMMENTARY:

KATSUTOSHI INADOME, FIXED-INCOME STRATEGIST, MITSUBISHI UFJ

MORGAN STANLEY SECURITIES, TOKYO

"There will be two key points for the bond market to watch going forward: first the fiscal and second the political implications of the outcome.

"Ozawa was seen as more inclined to boost spending while Kan was considered more fiscally frugal. But Kan may end up spending in the longer run as the economic stimulus steps approved last weekend may need to be followed up with additional measures. Kan may also have to place Ozawa's associates in key party posts, which could loosen his fiscal austerity stance.

"From a political perspective the market could remain volatile due to uncertainty if differences within the party are not quickly buried after the bruising vote. JGBs are rising in an initial reaction, but today's outcome may not anchor down yields in the longer term."

KOICHI NAKANO, PROFESSOR, SOPHIA UNIVERSITY, TOKYO

"I think he (Kan) will have to pay serious attention to Ozawa and his crew but more to his crew than Ozawa himself. He will probably reach out to the younger members of Ozawa's camp.

Ozawa will not leave immediately -- he wouldn't want to appear a bad loser. He will prefer to see what Kan does with his followers. I guess the next occasion is when Kan's support rates go down and then there will be an opportunity for Ozawa to play another trick. I don't think he will be finished until he is dead and buried. At the end of the day, he is a destroyer.

"The (opposition) Liberal Democratic Party may feel it is easier to deal with Kan. Ozawa is a formidable operator and they would be wary of Ozawa. An overture to Kan will be more forthcoming because he is less threatening.

"But he must act swiftly ... His time is limited."

JONATHAN ALLUM, EQUITY STRATEGIST, MIZUHO INTERNATIONAL,

LONDON

"Since Mr. Kan's victory was expected its should not have a significant short term effect on markets. Immediately after the announcement there was a slight strengthening of the yen but this is probably of only transient interest.

In the longer term I expect the implications are positive or, to put it more accurately, the implications of an Ozawa victory would have been negative. If Ozawa had triumphed, he would have been the third Prime Minister in 2010 and the sixth to follow Mr. Koizumi - of which only one actually won a general election.

This rate of turnover is absurd and brings Japanese democracy into disrepute, providing international investors with yet another reason to give the place a wide berth. The DPJ has made much of its (laudable) aim of transferring political power from unelected bureaucrats to elected politicians - this is not possible if the latter change every few months."

JESPER KOLL, DIRECTOR OF EQUITY RESEARCH, JP MORGAN

SECURITIES JAPAN

"With Kan it was always going to be another committee being set up, another study group being formed before you start to get some decisive action. There was a sense that with Ozawa you were likely to get some kind of action.

"The big question is whether Kan can jump beyond his shadow and actually prove himself as a reformer, as somebody who can entice risk-takers, entrepreneurs who actually go out and create jobs."

SHUJI SUGATA, MANAGER, MITSUBISHI CORP FUTURES, TOKYO

"If Ozawa had won, the yen might have been sold on deepening political confusion, but Kan's victory was more or less already factored in and will not change the broad trend of dollar weakness and yen strength.

"Kan's top priority is what he will say and do about the exchange rate, with the yen renewing 15-year highs."

CHRISTIAN LAWRENCE, CURRENCY STRATEGIST, RBC, LONDON

"The yen got a boost from the result, though there had been rumors beforehand that Ozawa's bid was likely to fail. Clearly the market viewed the result as yen positive, and the yen is likely to continue drifting higher both against the dollar and on the crosses. Kan's reappointment will pave the way for the market to pare back expectations about a rising risk of intervention."

JEFFREY KINGSTON, DIRECTOR OF ASIAN STUDIES, TEMPLE UNIVERSITY, TOKYO

"The big question is what will Kan do to try to heal the party ... Maybe he will try to be accommodating and give Ozawa people cabinet posts. Kan is already going into a divided parliament and the last thing that he needs is a badly divided party. The vote of the MPs suggests there are divisions.

"The DPJ comes out of this a wounded party but the problem is not its internal divisions but the divided parliament. Going ahead with a legislative agenda will be difficult.

"Ozawa's problem is who will follow him into the political wilderness. He doesn't have a position of power in the party and there is not a prospect for many to follow him out of the party, and none of the other parties want any part of him. Never say never, but this looks like his last throw of the dice."

KAZUYA ITO, FUND MANAGER, DAIWA SB INVESTMENTS

"Kan's winning the post is positive for the JGB market as he is viewed as more in favor of fiscal reconstruction, including debating a consumption tax increase.

"But there is no change in the deadlock in parliament, so one focus will be which party the DPJ will form a coalition with or cooperate with on policies.

"The BOJ is expected to stay under pressure from the government but the degree will likely be the same, as Kan is viewed as showing less leadership than Ozawa. But the outlook for BOJ easing will largely depend on the U.S. economy and Fed moves."

MITSUSHIGE AKINO, CHIEF FUND MANAGER, ICHIYOSHI INVESTMENT MANAGEMENT CO LTD

"He's not very attractive for the markets. It will probably mean more of the same in terms of policy, so there is no reason to welcome him. There may be more pressure on the yen, and there is the question of whether there will be intervention under Kan's leadership.

"It's not that the market will give up hope, but he is not going to raise hopes.

"Under Ozawa, there might have been something new, but under Kan it's going to be difficult to get out of this deadlock.

"Japan's stocks are moving on U.S. fundamentals, so we are really waiting for news from there."