Aso policies seen as short-term fix

Economists fear new team won't take bold steps

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Prime Minister Taro Aso’s choices for finance and economic ministers failed to impress economists Wednesday, who said they are not likely to take bold measures to shore up an economy threatened by the global economic downturn.

A lack of reformists in the new Cabinet, as well as its anticipated short life span, has raised concerns among economists that Aso will only carry out conservative steps with a short-term effect on the economy.

“It is clear that the lineup does not include reformers or people who are reform-minded,” said Hideki Hayashi, chief economist at Shinko Securities Co.

Hayashi said investors, especially in the United States and Europe, are worried about Japan’s ballooning fiscal deficit and are concerned over Aso’s intention to raise fiscal spending to jump-start the economy.

In particular, the appointment as finance minister of 55-year-old Shoichi Nakagawa, a former policy chief of the ruling Liberal Democratic Party, may indicate a departure from previous Finance Minister Bunmei Ibuki’s balanced budget policy.

“We’re not in a situation where we can stick to the goal of restoring a primary surplus by fiscal 2011,” Nakagawa wrote in the Yukan Fuji newspaper this month.

He also wrote the country needs fiscal stimuli, including the reintroduction of income tax breaks, lower corporate taxes and other measures that will kick-start the economy.

Meanwhile, not all ministers in Aso’s Cabinet share the new prime minister’s enthusiasm for fiscal spending, said Takahide Kiuchi, chief economist at Nomura Securities Co.

While Aso and Nakagawa advocate fiscal spending to provide a boost, economic and fiscal policy minister Kaoru Yosano supports a more austere policy of reducing the budget deficit.

Meanwhile, Minister of Economy, Trade and Industry Toshihiro Nikai emphasizes economic growth to increase tax revenues, economists said.

“The Cabinet may experience friction over economic policies,” Kiuchi said.

Also, the view that Aso’s tenure will be short is lowering expectations for the new government, economists said.

Aso is widely expected to dissolve the Lower House soon, possibly as early as October, for a snap election and it is possible the opposition, led by the Democratic Party of Japan, could take control of the government.

Aso has already pledged to undertake a special reduction of income and residence taxes for fiscal 2008 and push a supplementary budget through the Diet before dissolving the Lower House.

“The tax cut, for example, will support people’s consumption for a while, but it is not the type of measure to solve the fundamental problems (of the economy),” Nomura Securities’ Kiuchi said.

Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co., is worried that the balanced budget policy will be delayed.

He said the new government appears to be headed toward a heavy increase in fiscal spending through a combination of the supplementary budget and lower taxes. If so, the Cabinet will postpone balancing the budget.

“(Aso’s) economic policies could be far from adequate” from a long-term perspective, Muto said.

Nomura’s Kiuchi thought it was more important for the new government to carry out tax reduction with a longer-term effect on corporate activities, such as to support investment and research and development.

The supplementary budget, which aims to help small- and medium-size companies raise enough funds, will not have a positive effect on the economy, he added.

Sumitomo Mitsui’s Hiroaki Muto thinks more reforms will be necessary.

“Measures need to be taken to strengthen (the nation’s) industrial competitiveness,” Muto said, adding such steps include eliminating waste in the government’s special account expenditures, deregulation and corporate tax cuts.

Economists also said the launch of the new government is not likely to have a big impact on financial markets.

The prospect of large fiscal expenditures and a lack of reforms usually leads to the yen being sold, but the effect on the market would be limited, given that the dollar is under strong pressure to be sold amid the U.S. financial crisis, said Shinko Securities’ Hayashi.

“But I think investors would expect Japanese politics to be more stable in the long term,” Kiuchi said, if the DPJ, which already has a grip on the Upper House, wins any snap Lower House election.