TOKYO (Reuters) - Key economic ministers retained their posts when Japan’s new prime minister picked his cabinet on Tuesday, but analysts remain wary about whether the new government can keep its fiscal discipline.
Fukushiro Nukaga held his job as Japan’s finance minister and Hiroko Ota was reappointed economics minister by Prime Minister Yasuo Fukuda, who won approval in parliament earlier in the day.
Financial markets largely shrugged off the widely expected reappointments, but economists said they still worried that Fukuda may buckle to pressure to boost spending in rural areas, despite a persistent budget deficit and high government debt.
Since a devastating defeat in an election in July, ruling party lawmakers, including Fukuda, have stressed the need to help the countryside, which is struggling after years of painful structural reforms and spending cuts.
But Nukaga said that Japan’s new government should continue to repair its bruised finances and erase its fiscal deficit, which was 6 percent of gross domestic product last year.
“I will do my best in restoring the nation’s finances while ensuring economic growth,” Nukaga told a news conference after his reappointment.
The new prime minister told him to ensure the government met a fiscal target of bringing the annual budget, excluding debt costs, back into surplus by fiscal 2011/12, he added.
But worries about a possible delay in achieving the goal linger after New Komeito, the junior partner in the ruling coalition, suggested last week the target should be reviewed.
MOUNTAIN OF DEBT
“I don’t think the government will derail its plan to achieve a primary budget balance by 2011/2012,” said Masaaki Kanno, chief economist at JPMorgan Securities.
“But the possibility is high for the government to increase spending in areas related to rural areas and social welfare.”
The fiscal balance target is regarded as the first step to curb Japan’s mountain of outstanding debt, which stands at about 150 percent of gross domestic product -- the highest in the industrialised world.
Japan’s primary budget deficit is forecast to shrink by almost halve to 4.4 trillion yen ($38 billion) in the fiscal year to next March.
Fukuda’s Liberal Democratic Party is already in talks with New Komeito to freeze a planned increase in the amount of money the elderly pay for medical services.
“Nukaga has vowed to discuss whether to raise the consumption tax rate from the current 5 percent, so I expect him to tackle fiscal reforms on the front of both spending and revenue,” Kanno said.
Ota, who will continue to serve as a spokeswoman for the government’s top economic council, also vowed to promote fiscal reform, while revitalising rural areas.
“The prime minister told me to tackle the goal of achieving sustainable economic growth. I understand that means we need to realise both economic growth and fiscal reform,” Ota told a news conference after her reappointment.
On monetary policy, Ota has been cautious about any premature rate hike by the Bank of Japan given subdued inflation. Her reappointment could mean sustained government pressure on the central bank, which wants to raise rates once uncertainty over the U.S. economy and global credit market turmoil fades.
Yoshimi Watanabe was reappointed as the minister in charge of financial services and administrative reforms, a job that includes regulation of financial markets.
Abe abruptly resigned this month after a year in office dogged by scandals, an election rout and a deadlock over Japan’s support for U.S.-led operations in Afghanistan.
Additional reporting by Yoko Nishikawa
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