Markets relieved by Noda but obstacles remain

Finance chief bent on fiscal reform, holding yen in check

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Staff Writers

Market watchers and political experts welcomed the victory of Finance Minister Yoshihiko Noda, an advocate of a tax hike and a fiscal hawk, in the Democratic Party of Japan’s presidential race Monday but the new DPJ leader, who was expected to be appointed prime minister Tuesday, faces an uphill battle in rebuilding the nation’s fiscal health.

“The bond market has expectations for Noda’s fiscal reconstruction and takes the result favorably,” said Hideo Kumano, senior economist at Dai-ichi Life Research Institute.

The market has taken heed of the DPJ’s tax increase stance, particularly since Moody’s Investors Service Inc. lowered the credit rating of Japanese government bonds.

On Aug. 24, the agency said it had lowered the country’s rating — the first downgrade in nine years — citing the huge budget deficit as well as political instability, which it said has hampered drastic reform initiatives.

On the currency market, a Noda administration is likely to have more success in stemming the yen’s sharp appreciation against the dollar, as it will be easier for the Bank of Japan to cooperate with the person who served as finance minister than other candidates, many of whom looked too aggressive in putting pressure on the BOJ in dealing with deflation and the yen’s rise, Dai-ichi’s Kumano said.

If the Noda Cabinet can hammer out reconstruction plans early and craft an additional large-scale supplementary budget, the stock market could also react positively, he said.

But Fukashi Horie, professor emeritus of politics at Tokyo’s Keio University, was pessimistic.

“If Noda is able to seek fiscal balance while also pursuing the political pledges in the DPJ manifesto, then he will make great achievements,” Horie said. “But I fear that properly managing all the factors that come into play, such as handling of the resilient bureaucrats, won’t be so easy.”

Noda, 54, is replacing Prime Minister Naoto Kan, who leaves a government ¥900 trillion in debt.

Noda will be faced with a lengthy to-do list on the economic front that includes handling the yen’s excessive surge, paying for the Tohoku region’s restoration and juggling both the supplementary and annual budget plans.

Fiscal reform efforts took a back seat during Kan’s tenure due to the March 11 disasters.

Although a consumption tax hike was floated to repay the debt and ever-increasing social welfare costs during Kan’s stint, opposition from within the DPJ delayed the discussion.

The native of Chiba Prefecture was the sole candidate among those running in the DPJ race considered as being oriented toward fiscal reform measures.

Although he has toned down his stance lately, he has been an avid promoter of a tax hike to pay for Tohoku’s restoration.

“It is an issue that can’t be shelved in any administration,” Noda said of a tax hike during policy debate over the weekend.

“After slashing expenditures, we need a tax hike on a temporary basis.”

Noda has also reiterated his support for raising the sales tax to 10 percent by the middle of the decade in order to cut the government’s debt.

He also advocates easing the burden on the private sector, saying the corporate tax should be slashed by 5 percentage points in order to support business competitiveness.

On the surging yen, Noda has already worked with the BOJ on two interventions in the foreign exchange markets since March 11.

He was also a central figure in writing up a $100 billion program designed to extend loans to domestic firms to spur overseas investment.

In recent debates and news conferences, Noda has stated he would continue to keep the foreign exchange market in check, vowing to act quickly if any speculative trades are driving the yen.

Overall, Noda is known for his expertise in fiscal and economic policies, having served as senior vice finance minister from September 2009 in Yukio Hatoyama’s Cabinet and then being promoted to finance minister when Kan left that post to become prime minister in June 2010.

But running the government will be a difficult job, and one of the first major tasks for Noda will be to write up next year’s annual fiscal budget, which is already facing a major delay.

The Cabinet last week approved plans to delay the deadline for funds requests made by ministries for the fiscal 2012 budget by a month, citing work on the third supplementary budget and Kan’s imminent resignation.

Noda will be tasked with making use of his experience as the DPJ Diet affairs chief in order to work out an accord on the budget bills with opposition parties.

He appears to have a head start on collaborating with the Liberal Democratic Party, whose president, Sadakazu Tanigaki, praised Noda by saying earlier this month that he “is not a person who acts without thinking much.”

The first glimpse of how Noda will handle tough economic and fiscal issues will be demonstrated once he reveals his Cabinet lineup.

“The key will be for him to appoint a finance minister who shares his beliefs and will not back down against the bureaucrats, in order to materialize DPJ’s policies,” Keio University’s Horie said.