International | Sep 28 2006
By Chris Shaw
Following in the footsteps of a popular leader is always difficult, so the task ahead of Japan’s new Prime Minister, Shinzo Abe, appears daunting enough given he follows on from the highly popular Junichiro Koizumi.
But with Abe appointing his first cabinet this week it seems the task he faces is even tougher, as while his choices were popular with the general public (a Yomiuri Shimbun poll indicated an approval rating for the cabinet of 70.3%) they have not been met with great acclaim by financial market participants.
Both Macquarie and GaveKal Research were left unimpressed, Macquarie regarding it as a missed opportunity in terms of continuing the reform program begun by Koizumi. The broker also suggests the appointments indicate economic issues are unlikely to be the primary focus of the new leader, as it will be social and constitutional reform and foreign policy that is targeted.
GaveKal agrees, but points out given Abe is less popular than Koizumi his ability to drive reforms is likely to be somewhat reduced and he is more likely to need to make compromises within the party. Such a view ties in with that of Macquarie, as it suggests the bureaucracy may become stronger and politicians weaker under Abe.
Abe has chosen Koji Omi as finance minister, who is on record as seeking a doubling of the consumption tax from its current level of 5%. Credit Suisse expects he will be joined in targeting this goal by new Labour minister Hakuo Yanagisawa, though the broker notes any increase is unlikely prior to Upper House elections next summer.
Economic and fiscal policy has been given to Hiroko Ota, who GaveKal notes is not a key reformer. Nomura Securities cautions against jumping to conclusions about the appointments though, noting without details of the government’s policies being released it is difficult to form an opinion as to what the cabinet will achieve.
If the outcome is an increase in the power of the bureaucracy it may not be all bad according to Macquarie, as it points out if the Ministry of Finance can continue to drive fiscal consolidation there is the chance it can persuade the Bank of Japan into slowing down the pace of increase in interest rates.
Despite this, GaveKal suggests foreign investors are likely to be disappointed by the choices as a good portion of the money that has gone into the Japanese market was invested with the idea significant domestic reforms could be achieved and the new cabinet makes this less likely. As a result it suggests the sideline remains the place to be in the short-term, even though the fundamentals suggest there is some value in the market at current levels.
Macquarie puts it best, noting even with the new cabinet being regarded as a disappointment there is no change to its positive view on Japan’s prospects, as the recovery is occurring despite the political outcomes and not because of them.
