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By Leika Kihara
TOKYO, June 2 (Reuters) - After eight months of a prime minister who seemed to have his head in the clouds, Japan could get a policy pragmatist ready to tackle the huge national debt if, as many expect, Finance Minister Naoto Kan gets the job.
Kan, a former health minister once known for battling bureaucrats, has forged an image as a fiscal conservative and occasional central bank critic since assuming the finance post in January.
That could raise the chances of bolder steps to rein in a public debt already about twice the size of Japan’s GDP, a stance investors and many voters would welcome, although lawmakers running in an election expected next month might be wary. [ID:nTOE65100Q]
Kan, a former party leader who quickly learned the danger of off the cuff comments on economic policies, will have to read up on diplomacy fast if he takes the top post to keep ties with ally Washington on track and prevent friction with a rising China from flaring.
Known for his quick temper and sharp debating skills, Kan, 63, is frontrunner to replace Yukio Hatoyama after the premier stepped down to revive the Democrats’ fortunes in an election next month, less than a year after sweeping to power.
“He’s less dreamy than Hatoyama,” said Koichi Nakano, a professor at Sophia University in Tokyo, noting Kan got his start as a grassroots activist. “He’s a common man ‘just like us’.”
That could put him more in tune with voters turned off by the wealthy Hatoyama’s indecisiveness and otherworldliness, although Kan is hardly a fresh face.
Having seen Greece’s debt problem turn into a European crisis when attending G7 and G20 meetings as finance minister, Kan has been among the most vocal cabinet members in calling for the need to come up with a credible long-term fiscal reform plan.
Analysts say Kan, a veteran lawmaker who founded the Democratic Party with Hatoyama more than a decade ago, also has the political clout and skill to muscle through needed reforms, though party dynamics make success uncertain.
Kan is one of the few cabinet members urging a debate on raising the 5 percent sales tax to plug budget holes, although the party has pledged not to do so until after a general election due by late 2013.
“Whether he gets his way at this juncture is hard to tell,” Nakano said.
Kan seems to be the favourite choice for bond markets.
“It would be welcome news for the JGB market because Kan is more proactive about fiscal discipline and about raising the consumption tax than any other cabinet minister,” said Hirokata Kusaba, a senior economist at Mizuho Research Institute.
But Kan himself has been cautious of being branded a fiscal hawk. He also has a talent for nuanced remarks that can be interpreted in many ways, and may shift away from his stress on fiscal austerity if needed to win votes in the upper house poll.
Kan has been a vocal critic of the BOJ when it was reluctant to ease monetary policy. He has toned down his criticism lately but wants the BOJ to target inflation of 1 percent, a level about in line with what the bank defines as long-term price stability.
With the economy in relatively good shape and the BOJ having already taken several steps to try to beat deflation, Kan is unlikely to put pressure on the bank soon for further easing.
But Kan could quickly turn up the heat on the BOJ if the economy takes a turn for the worse.
He also faces challenges on the diplomatic front, where his views are less well-known. He is likely to stick to the Democrats’ basic line of seeking a more equal partnership with the United States and closer ties with Asia including China.
But implementing a deal clinched by Hatoyama with Washington to shift a controversial U.S. airbase to a less populous northern part of Okinawa will be a big challenge, given local opposition.
Hatoyama’s decision to abandon a campaign promise to move the base off the southern island, host to half the U.S. forces in the country, was the last nail in his political coffin, helping to send his ratings below 20 percent.
Kan became Japan’s most popular politician for a time when he battled bureaucrats as health minister in 1996 to expose a scandal over HIV-tainted blood products.
In 2004, he was forced to step down after confessing that he had failed to pay some contributions into the public pension system, just as he and other Democratic Party lawmakers were attacking members of the government for similar lapses.
Seeking to atone for his mistakes, Kan shaved his head and donned a Buddhist monk’s attire for a traditional pilgrimage to temples on the southern island of Shikoku. (Additional writing by Linda Sieg)