Aso in charge could foil fiscal discipline

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Prime Minister Yasuo Fukuda’s sudden resignation will not cause a political vacuum, economic ministers claimed Tuesday, but analysts warned that Japan’s fiscal discipline may be sacrificed if Taro Aso becomes the next prime minister and tries to spend the government’s way out of economic trouble.

“The government and ruling parties have decided to compile a supplementary budget,” Finance Minister Bunmei Ibuki told reporters Tuesday morning. “We will compile the supplementary (budget) without delay.”

Last week, the government unveiled an ¥11.7 trillion economic stimulus package to be financed by a ¥1.8 trillion supplementary budget. This budget will be submitted to the extraordinary Diet session that will be convened after the next prime minister is chosen. The session had been expected to start Sept. 12, but Fukuda’s exit has moved the start date back.

Economic and fiscal policy minister Kaoru Yosano blamed the Democratic Party of Japan, the largest opposition party, for causing political gridlock by refusing to participate in Diet proceedings.

“Whether or not Prime Minister Fukuda quits, the political vacuum was about to be created by the DPJ’s unjustified resistance (in the Diet),” Yosano insisted.

Economists were not that surprised by Fukuda’s sudden resignation and believe it is unlikely to have a big impact on the economy.

“It is possible the financial markets will take the news as political stimulus and it could be a positive factor,” said Shinichi Ichikawa, a strategist at Credit Suisse First Boston Securities Ltd. in Tokyo.

He said Fukuda increasingly found himself at a loss in how to deal with the opposition parties’ control of the Upper House amid his lack of initiative and slipping approval ratings.

Koichi Haji, chief economist at NLI Research Institute, suggested Fukuda’s exit will have no major impact on the economy.

“The ruling and opposition parties dominate different houses of the Diet. So there was always a high possibility that the administration would be gridlocked,” Haji said.

“It was not really a big surprise. In that sense, it doesn’t have a major negative (effect) on the economy,” he said.

However, Haji said he was concerned about a delayed introduction of the economic stimulus package. “There will be a vacuum in economic policies, psychologically causing some negative (impact)” on the economy, he said.

Economists were also alarmed that Aso, the Liberal Democratic Party’s secretary general who is expected to run for the LDP presidency, might increase government debt and damage the economy in the long run if he succeeds Fukuda.

Aso has actively supported fiscal spending for public works projects as economic stimulus steps. Last month he said the government may need to consider postponing its goal of balancing the budget by fiscal 2011 because of the economy’s weakened state.

“Big government is not always bad. But now, the only way to revive the economy is to reinvigorate the private sector,” Credit Suisse’s Ichikawa said. If Aso turns to big government spending, “it could hamper the country’s economic recovery as well as the stock market,” he said.

NLI Research Institute’s Haji shared a similar view. “In the short run, (Aso) could implement a little more active economic policy than the Fukuda Cabinet,” he said, noting the economy could get a short-term boost.

“But that would include a negative effect, such as expanding the fiscal deficit, increasing government debt and causing long-term problems,” Haji observed.

Foreign investors might also expect the country’s fiscal and administrative reforms to stall under an Aso administration, Haji noted. If that happens, “there is a risk that (Japanese) stocks could be sold, or in extreme cases, that Japanese government bonds might be sold so interest rates would go up,” he said.