Japan Elects New Prime Minister with Finance Background

Japan (NYSE:EWJelected its sixth prime minister in five years on Tuesday, Finance Minister Yoshihiko Noda. He will replace Naoto Kan, who resigned last Friday, having promised to do so after the Japanese parliament passed a bond-issuance bill and renewable-energy bill. Kan was under heavy scrutiny and received much criticism for his government’s handling of the March earthquake, tsunami, and nuclear emergency.

Noda became finance minister in June 2010, and in that position he showed a willingness to act to contain the strength of Japanese currency, which has grown to such high levels that it has been crippling the country’s export business. Only last week he unveiled a plan to enhance monitoring of traders and create a $100 billion emergency credit facility. “We would give him a high mark on his handling of exchange-rate policy. Despite the financial turbulence of the past month, the level of the U.S. dollar (NYSE:UDN) is hardly changed from a month ago,” said Takuji Okubo at Societe Generale.

In terms of its debt-to-GDP ratio, Japan is by far the most indebted country in the world, with a debt that’s more than double the size of its economy. Noda is known for his willingness to raise taxes in order to contain the country’s debt, and he ran upon that platform while other candidates avoided the topic. “Noda is a strong advocate of tax-funded fiscal reform. He champions hikes in income, corporate and other ‘core taxes’ to pay for reconstruction, and seeks a higher consumption tax to fund future social-security obligations,” said Seiji Adachi, an economist at Deutsche Bank.

Though Noda has already been elected, he will continue to face political competition in the form of power broker Ichiro Ozawa. Within Noda’s own party, the DPJ, there are both pro- and anti-Ozawa forces. It was lawmakers unhappy with the idea of Ozawa gaining more influence within the party that helped Noda get elected. Division within Noda’s own party could hurt the DPJ’s public image, even lead to dissolution in the lower house of the country’s legislature, and increase the probability that there will be another election in 2012.

However, if Noda were able to successfully reconcile the DPJ and opposition parties, it would likely mean he’s trying to smooth the road to push through two extra budgets related to earthquake-reconstruction spending, according to Barclays Capital strategists. Takuji Okubo at Societe Generale says that, if Noda were to quickly pass a proposed third supplementary budget that would fund earthquake reconstruction while maintaining his stance of fiscal prudence, then he could hold on to his title. “While long tenure seems so hard to achieve for Japanese prime ministers, we think Noda has good potential,” said Okubo.

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