Analyst view: Japan PM set to reshuffle cabinet

TOKYO Fri Jan 14, 2011 3:18am EST

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TOKYO (Reuters) - Japan's Prime Minister Naoto Kan is expected to appoint a fiscal hawk as economics minister and replace his deputy in a cabinet revamp to smooth lawmaking in a divided parliament and tackle reforms to rein in public debt.

He will appoint former administrative reform minister Yukio Edano as his chief cabinet secretary and ex-finance minister Kaoru Yosano, 72, a vocal advocate of raising Japan's 5 percent sales tax to fix its debt-laden finances, as economics minister, Japanese media reported.

KEY POINTS

-- The appointment of Yosano would signal that Kan is serious about tax reforms needed to fund the ballooning social welfare costs of a fast-aging society.

-- Replacing outgoing Yoshito Sengoku with Edano as chief cabinet secretary could help clear the path for debate on the state budget for the year from April.

-- Finance Minister Yoshihiko Noda, Foreign Minister Seiji Maehara and banking minister Shozaburo Jimi will be among those to keep their portfolios, the reports said.

-- Parliament's opposition-controlled upper house passed non-binding but embarrassing censure motions against Sengoku and Transport Minister Sumio Mabuchi in November over their handling of a territorial dispute with China.

-- Opposition parties had threatened to boycott a debate on the 2011/12 budget unless the two were sacked.

COMMENTARY:

HIROMICHI SHIRAKAWA, CHIEF ECONOMIST JAPAN, CREDIT SUISSE,

TOKYO

"The expected changes in the economics minister's and trade minister's posts are nothing less than a message that the Kan government wants to lead fiscal reform with a sales tax rise and open up Japan markets through the Transpacific Partnership.

"The planned reshuffle is evidence that the government's sense of urgency has risen somewhat. In that sense, I would like to positively evaluate the reshuffle.

"Even though it seems there is a chance that progress will be made on policy discussion, policy proposals will remain just proposals without stable politics. Management of parliamentary affairs is expected to be quite tough because of the so-called divided parliament.

"It is possible that some budget-related bills may not be passed, and even the budget bill itself is at risk. There is a deep rift between the ruling and opposition parties over child allowance and farm subsidy policies. It is still a big question mark over whether debate on a major issue like raising the sale tax is possible when near-term policy management is uncertain."

FUMIYUKI TAKAHASHI, EQUITY STRATEGIST, BARCLAYS CAPITAL JAPAN

"If the cabinet reshuffle turns out as media have reported, the highlight will surely be Kaoru Yosano's arrival. The remaining line-up is just a reshuffling (of existing members) and will have almost no impact.

"The point will be how Yosano, a fiscal hawk, displays his abilities in the cabinet, but this year we have nationwide local elections, and considering the last upper house elections, they will be cautious about following a path of fiscal reform that includes a sales tax hike.

"But they must proceed with a debate over the medium term on fiscal reform. The combined debt of the national and local level is double GDP, and it boosts the risk of rising interest rates. Even if they don't set out on fiscal reform now, they must show the market their path to fiscal reform.

"Further, many corporate executives and market participants want Japan to join the Transpacific Partnership, and assessments of the cabinet will depend greatly on whether there is progress on this."

MIKITAKA MASUYAMA, PROFESSOR, NATIONAL GRADUATE INSTITUTE FOR

POLICY STUDIES, TOKYO

"This is going to be a cabinet with considerable contradictions. Yosano was once in charge of the Liberal Democratic Party government's economic policy. Embracing his economic policy is tantamount to ditching what the Democratic Party has been doing.

"He said in a news conference (on Thursday) he would cooperate with the Democratic Party. But that totally contradicts what he has been saying and publishing. He has said how he is anti-Democratic Party and how he aimed to topple the government.

"Furthermore, Yosano and Banri Kaieda (who is expected to become the new trade minister) are political rivals from the same electoral district ... I don't think a cabinet with this much conflict can govern well."

TAKEO OKUHARA, FUND MANAGER, DAIWA SB INVESTMENTS

"Edano's appointment as chief cabinet secretary will make negotiations within the DPJ and with other parties difficult, given his strong character. He has many enemies even within the party and his appointment could risk deepening political confusion and risk stalling political negotiations on key issues.

"Yosano's appointment will harden the LDP's stance on key issues as well, including TPP and tax increases, while Yosano himself will likely lose popularity due to a lack of political consistency.

"I don't think the latest reshuffle will lead to a recovery in the Cabinet support rating."

HIDENORI SUEZAWA, CHIEF STRATEGIST, NIKKO CORDIAL SECURITIES

"The cabinet reshuffle may only have a limited impact on the bond market. The main focal point is whether the ruling party can successfully steer the parliament.

"The ruling party has to pass the budget first. We can only begin thinking of the market implications of the reshuffle when the ruling party is running the parliament smoothly."

JESPER KOLL, DIRECTOR OF EQUITY RESEARCH, JPMORGAN SECURITIES

JAPAN

"The bigger picture is that they (the ruling party) will lose big time in the April (local) elections and that is when the knives will come out for (Prime Minister Naoto) Kan. That is when the party will split up. Flipflopping from handing out money to people to raising taxes means the likelihood of a split has now increased. And it is not just power politics, it is a policy debate between those who want to increase the VAT and those who don't.

"Bringing in Yosano, no matter how much expertise he has, is not going to reinforce the image of the Democrats as a party of change. Indeed, there is a chance that it could backfire."

AKITSUGU BANDOU, SENIOR ECONOMIST, OKASAN SECURITIES, TOKYO

"If the prime minister appoints Yosano, it will give an impression that Japan's fiscal and tax reform will progress, led by the finance ministry. And this will probably ease concerns to some degree about supply and demand worries in the bond market.

"But the government will continue to face a severe situation because of political deadlock and the cabinet reshuffle is not necessarily going to change the situation that the DPJ lacks political power."

SEIJI ADACHI, SENIOR ECONOMIST AT DEUTSCHE SECURITIES, TOKYO

"The reported cabinet lineup suggests that the government wants to steer its policy toward fiscal reform and joining the Transpacific Partnership (TPP) free trade initiative, while getting rid of the influence of ruling party powerbroker Ichiro Ozawa and aiming for a grand coalition with opposition parties.

"Kaoru Yosano, if appointed economics minister, is likely to be given a leading role in reforming the tax system and deciding on a sales tax hike as the government apparently wants to carry out the hike as early as possible, in fiscal 2012/13 or the following year.

"The Japanese economy's improving outlook may help accelerate the tax debate by eliminating the need for the government to implement additional stimulus. The ruling and opposition parties may not agree on every policy but they may be keen to discuss a sales tax hike."

BACKGROUND

-- The government can enact the budget because the DPJ controls the powerful lower house, but the opposition can block enabling legislation in the upper chamber.

-- Yosano held key posts including the economics portfolio in Liberal Democratic Party (LDP) governments before it was ousted by Kan's Democrats in 2009. He bolted the LDP in 2010 to set up the Sunrise Party, which he said on Thursday he would leave.

-- Private economists largely agree that raising the sales tax is essential but many lawmakers fear angering voters, especially ahead of local polls in April.

-- Kan led his party to defeat in an upper house election just a month later after clumsily floating a possible rise in the 5 percent levy.

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