Nakagawa fiasco another hit to economy

Market players to shun buying assets in Japan

by Maya Kaneko

Kyodo News

Finance Minister Shoichi Nakagawa’s abrupt resignation over his wobbly performance at a news conference in Rome is feared to further drag down the economy, having shaken the “control tower” of Japan’s economic policies.

Nakagawa, who doubled as financial services minister, will be replaced by economic and fiscal policy minister Kaoru Yosano, 70, who will now hold three posts, Prime Minister Taro Aso said.

Economists are worried that the exit of the minister who was instrumental in mapping out economic policies will deal a serious blow to the already embattled economy, which posted the sharpest contraction in 35 years, or an annualized real 12.7 percent, in October-December 2008.

At a weekend Group of Seven meeting in the Italian capital, financial leaders pledged to “front-load” fiscal policy measures, but the Japanese political mess could block swift budget implementation.

Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said market players will refrain from buying assets in Japan because the resignation of Nakagawa, a close ally of Aso, has hit the already feeble prime minister’s power base.

“Now that the political outlook has become murkier, I expect yen selling and declines in Tokyo stocks in the short term,” Shirakawa said. “Investors could also sell Japanese bonds, triggering a triple selloff.”

After Nakagawa announced shortly before 1 p.m. that he would step down, the yen briefly lost ground against the dollar and Tokyo stocks closed at a near four-month low.

Shirakawa said even though the yen’s depreciation will benefit Japanese exporters, the political uncertainty would fuel public anxiety and discourage consumers from spending.

The Credit Suisse economist also said it was disastrous that Nakagawa called it quits while U.S. Secretary of State Hillary Rodham Clinton was visiting Japan.

“The U.S. administration must have got an impression that Japan is in serious political turmoil. They must be thinking they cannot talk to people who may be replaced soon,” he said.

A month after the G7 Rome meeting, financial chiefs of the advanced economies and emerging countries will meet in London to lay the groundwork for a second global financial summit slated for April 2 in the British capital.

Shirakawa called for “resetting” economic policies by holding a general election at an early date.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said Japan should not create a “vacuum” in implementing economic policies and he anticipates Nakagawa’s successor will lead the compilation of an additional economic stimulus package.

Following the release of dismal GDP data Monday, some government officials and ruling coalition lawmakers called for fresh stimulus measures, on top of already announced steps worth a total of ¥75 trillion.

Yosano, known as a strong advocate of a consumption tax increase, is in accord with Aso, who has pledged to raise the tax from the current 5 percent in three years.

“Under Yosano’s leadership, Japan would boost spending and try to improve its fiscal position by raising the consumption tax in the future,” Kumano said.