TOKYO Japan's inexperienced new government has picked a fiscally conservative and seasoned pair of hands for finance minister, Japanese media say, but investors wonder how much clout Hirohisa Fujii will have in setting the government budget.
Fujii, a 20-year veteran at the finance ministry and a former minister in the early 1990s, may find his wings clipped as budget spending -- a key risk for bond markets -- will be led by a powerful new state planning agency.
Some also fear that, at 77, Fujii may find it hard to cope with the rigors of international finance meetings as countries seek to rebuild the global economy after the financial crisis.
Fujii is returning to the job he held for 11 months in 1993-94, when Japan's long-dominant Liberal Democratic Party (LDP) last lost power.
The pick of Fujii was welcomed by analysts worried that the new government's spending plans -- such as child allowances and toll-free expressways -- will boost issuance of Japanese government bonds as Japan struggles to emerge from recession.
Fujii's backing for ultra-loose monetary policy means he is unlikely to rock markets but some analysts feared he may try to wean Japan too quickly off its reliance on exports for growth and allow the yen to rise.
"What worries me about him is his comments that seem to support a strong yen," said Kyohei Morita, chief economist at Barclays Capital.
"Fujii needs to improve his communication with markets, especially with currency market players, even if he is following his beliefs. He can let the yen rise after transforming the economy into one led by domestic demand, but there is risk of the yen rising further before that happens."
Fujii has recently cautioned against intervening in currency markets, although Japan sold more than 2 trillion yen for dollars in markets during his previous tenure as finance minister.
"He's on the record saying that he doesn't believe in intervention. It's unlikely they would act should the dollar fall under 90 yen," said Richard Jerram, Macquarie's chief Japan economist in Sydney.
The Japanese yen rose to a seven-month high near 90 per dollar on Monday as the U.S. dollar tumbled.
Working in Fujii's favor is his closeness to former Democratic Party leader Ichiro Ozawa, a powerful figure in the party, although there have been some media reports that the two fell out because Fujii urged Ozawa to quit following a fundraising scandal earlier this year.
Japanese government bond yields have been stable since the Democrats won a landslide election victory on August 30, but investors are still nervous about their pledges to spend more on families and consumers that could inflate Japan's huge public debt, already 170 percent of GDP.
"I suspect, at the end of the day, they are going to have to issue more debt to finance the measures. But over the near term, markets will tolerate additional issuance of JGBs as a way to sustain some of the stimulus," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
The Democrats say they will pay for new spending by cutting waste, and analysts say Fujii -- who has pledged to cut bond issuance -- will make sure that promise is not forgotten.
"The appointment is a positive move for the bond market as Fujii has placed a strong emphasis on trying to tap sources of financing so the government does not have to issue more debt," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.
Fujii has said the government will have to consider raising the 5 percent sales tax to fund ballooning social security costs, although the Democrats have pledged to hold off on a hike for the next four years.
Fujii will likely have more say on currency policy, where he has raised the prospect of a stronger yen, suggesting this government may move Japan away from its focus on export-led growth.
"If Japan's economy is strong so is the yen, and if it's weaker than the U.S. economy the dollar will strengthen. It's quite natural," he told Reuters in an interview in July.
"Unless currency moves are abnormal I don't think we should intervene in currency markets."
On monetary policy, he has hailed policy steps the Bank of Japan has taken so far to bolster the economy, and said that the current interest rate of 0.1 percent is appropriate.
Fujii's two decades experience at the finance ministry, where he rose to a senior role in the budget bureau, should stand him in good stead as the new government seeks to reduce bureaucrats' clout and redirect spending.
But there is also the risk that Fujii, having already retired once and only just back in parliament after four years away, may not be a long-term choice.
(Editing by Rodney Joyce and John Chalmers)