August 26, 2011

Japan’s Prime Minister Steps Down

Former BOJ official calls for continuation of fiscal reform by successor

Prime Minister Naoto Kan of Japan resigned from leadership of his party on Friday and confirmed that he would step down from his government post, leaving the path clear for a successor to be chosen on Monday.

At the same time, Toshiro Muto, former Bank of Japan (BOJ) deputy governor and a former top bureaucrat at the nation's finance ministry, called for a continuation of efforts to reform fiscal policies regardless of who Kan's successor might be.

Bloomberg reported that Kan took the action after Parliament passed two key pieces of legislation he had pushed for: one to subsidize renewable energy and the other to allow the government to issue more debt. He had suffered a tremendous loss of support over his handling of the disaster at Fukushima, and only survived a no-confidence vote earlier in the year by a promise to step down later.

Muto, according to a Reuters report, said that BOJ should consider additional quantitative easing (QE) because its other currency interventions have had a limited effect; the strength of the yen is adding to Japan's economic woes. He also pushed for tax hikes as part of fiscal reform, saying that waiting too long could cause a market backlash.

Muto, currently chairman of private think tank Daiwa Institute of Research, was quoted saying, "If the government weakens efforts to restore fiscal discipline, Japan may face a market attack through a sharp bond selloff. While that may not happen immediately, the risk is quite high."

It remains to be seen what sort of approach will be taken by Kan's successor, since that too is embroiled in politics. Reuters reported that Ichiro Ozawa, powerbroker in Kan's Democratic Party of Japan, is thought more likely to support a candidate who will advance his own interests rather than making his decision based on policy. Kozo Watanabe, a senior official in the party, was quoted saying, "I've known Mr. Ozawa for 43 years and he has never acted based on policies."

It is thought unlikely that Ozawa will support the most popular candidate as a successor for Kan, former foreign minister Seiji Maehara. Instead he may turn to trade minister Banri Kaieda, who does not support the strong antinuclear position Kan took in office. Kan is still determined to push for an end to dependence on nuclear power, and said at his resignation, "In a severe environment, I did what I should have done."

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