Japanese Prime Minister Naoto Kan’s policies to contain a record public debt and prevent the yen’s surge may help the nation avert a selloff of bonds and stocks, according to Daiwa Institute of Research Ltd.
The new administration is focused on restraining government spending, raising taxes, easing monetary policy and preventing the yen’s advance, said Junichi Makino, a senior economist at Daiwa Research in Tokyo. Kan’s policies are a “complete reversal” from those advocated by his Democratic Party of Japan in its election pledge and “the market will like his flexibility and quickness to change sides.”
With the market focused on budget deficits and sovereign risks, Japan is “stripped naked” with large amounts of public debt and little room left for monetary easing, Makino said. The government “may trigger ‘Japan selling,’ unless it shows its commitment to controlling its spending and raising the consumption tax to about 20 percent.”
Japan’s public debt is 180 percent of gross domestic product, the worst among members of the Organization for Economic Cooperation and Development. Prospects are shrinking that domestic savings will help absorb the nation’s record debt.
Public debt totaled 882.9 trillion yen ($9.7 trillion) as of March 31, up 4.3 percent from a year earlier, according to the Ministry of Finance. The government plans to compile a medium-term fiscal framework and a strategy to rebuild its finances by the end of this month.
Members of Kan’s new cabinet will likely help prevent Japan selling, said Tomoko Fujii, a senior foreign-exchange strategist at Bank of America Merrill Lynch. “His key economic ministers are likely to agree on rebuilding government finances, while the cabinet of the former Prime Minister Yukio Hatoyama tended to favor increasing debt issuances.”
The new administration may pressure the Bank of Japan to ease monetary policy to prevent the yen’s appreciation, Fujii said. A policy mix of fiscal austerity, monetary easing and a weaker yen is similar to a strategy used by the former Prime Minister Junichiro Koizumi, she said.