Financial markets want the Cabinet of Prime Minister Shinzo Abe to keep pushing the reforms promoted by Junichiro Koizumi, analysts say, but some fear the negative impacts of expected tax hikes and a deterioration in the government’s relations with the Bank of Japan.
Market players closely followed the Tuesday formation of the new Cabinet, especially the key economic posts, for a clue to the speed of reforms going forward.
“I think the lineup is well-balanced,” said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp. “It appears that the groups cheering for Mr. Abe were put in position, and there have been no particular surprises.”
Abe, who has expressed his intention to follow Koizumi’s reform path, appointed Koji Omi, 73, a senior Liberal Democratic Party lawmaker and former trade ministry official, as finance minister.
Ardent Abe follower Yuji Yamamoto, 54, was named financial services minister, the nation’s top bank regulator.
“Although Mr. Abe has said he would follow the structural reform drive, detailed measures for the policy have yet to be seen,” said Kiichi Fujita, strategist at Nomura Securities Co.’s Financial & Economic Research Center.
Without seeing a detailed strategy, it is hard for the markets to assess the new government, he said.
Fujita added it is important for the Abe administration to draw up political measures “clearly,” as Koizumi did so with his pet policy of privatizing the postal system, to draw money from foreign investors.
He said foreign investors, who played a key role in driving up the key Nikkei stock average by 40 percent year-on-year last year, place more importance on the government’s economic measures than do domestic players.
Hiromichi Shirakawa, chief economist at Credit Suisse, said the Cabinet lineup sent negative messages to financial markets, which will never welcome potential tax hikes aimed at supporting Japan’s ailing social security system.
“Markets hope the government could possibly avoid raising taxes and pursue a smaller government,” he said, expressing disappointment at the selection of Hakuo Yanagisawa as minister of health, labor and welfare.
Yanagisawa, who headed the ruling Liberal Democratic Party’s Research Commission on the Tax System, is a hardcore advocate of fiscal rehabilitation and wants a near-future consumption tax hike.
Shirakawa said he is likely to get tax hikes on the new Cabinet’s agenda.
He also said the exclusion from the roster of Kaoru Yosano, economic and fiscal policy minister in the last Cabinet, could strain relations between the government and the BOJ.
Yosano was widely considered to be on the same wavelength as the central bank over its monetary policy. His departure “means the BOJ has lost an important supporter in the government,” Shirakawa said, suggesting the bank might face difficulty deciding to raise interest rates in the future.
With investors apparently waiting to see the formation of the new Cabinet, which had not taken place when the stock market closed Tuesday, both the value and volume of trading on the Tokyo Stock Exchange’s first section were at their lowest for this year.
The key 10-year Japanese government bond rose with the yield down to the lowest level in nearly six months.
Tokyo Stock Exchange Inc. President Taizo Nishimuro called on Abe to continue reforms in financial markets promoted by Koizumi.
He said at a news conference Tuesday that Koizumi’s reform initiative brought about a “big change” and successfully entrenched a trend of individuals increasingly shifting their savings to investment.
“I hope Mr. Abe will not prevent this trend while pressing for further reforms and liberalization,” Nishimuro said.
In the currency market, there was only muted reaction so far to the new Cabinet lineup, traders said.
“If the speed of reforms is viewed as being too slow, the stock market is likely to react sharply, so caution is needed,” said Yuichiro Harada, senior vice president of Mizuho Corporate Bank’s forex division.
But for now, currency traders’ attention is focused on major countries’ monetary policies, such as whether the United States will carry out a rate cut to cope with its slowing economy, he said.
ACCJ reform hopes
The American Chamber of Commerce in Japan on Wednesday welcomed the inauguration of Prime Minister Shinzo Abe’s Cabinet and expressed hope his government “commits to promoting further structural economic reforms.”
Charles Lake, head of the business lobby representing more than 1,400 companies, said in a statement the ACCJ “looks forward to working with the new Cabinet as a ‘Reform Oendan’ (support team) and continuing its advocacy activities to achieve its mission of further developing commerce” between the United States and Japan.
He said the chamber believes Abe’s “pledge to establish an ‘open and disciplined economy and society’ and achieve ‘economic growth led by innovation’ amid a globalizing world economy is an aim that is well-received internationally.”
The European Business Council in Japan, which represents some 3,000 European companies and individuals, also welcomed the inauguration of the Abe Cabinet.
“We applaud Prime Minister Abe’s promise to accelerate and reinforce the structural reforms that have been initiated over the past five years,” said EBC Chairman Richard Collasse.
“As a firm supporter of Japan’s reform policies, the EBC looks forward to working with the new Cabinet on regulatory reform to assist in achieving our shared goals of improving the business environment and increasing the levels of FDI (foreign direct investment) into Japan,” he said.
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