Kan's Leadership Victory Won't Help Japan Economy, Macquarie's Jerram Says

Prime Minister Naoto Kan’s victory in the Democratic Party of Japan leadership race won’t help the nation’s economy because of his lack of attention to the yen’s gain against the dollar, according to Macquarie Group Ltd.

Kan’s narrow defeat yesterday of party rival Ichiro Ozawa is also a negative for Japan’s economic outlook because of his tolerance for deflation and insufficient structural plans for growth, said Richard Jerram, head of Asian economics at Macquarie Research in Tokyo. Sydney-based Macquarie is keeping its forecasts for Japan’s Topix stock index unchanged at 980, and expects the yen will end the year at 90 to the dollar, Jerram said.

“Kan’s economic policies are moderately bad,” Jerram said in a telephone interview yesterday. “Presumably after this, Ozawa is going to be given some influence. So it’s not that bad, but an Ozawa win would’ve been better in terms of the direction of economic policy.”

The ruling DPJ chose Kan, 63, over Ozawa, 68, by just six votes in a leadership ballot of lawmakers. Regional party and local assembly members helped him win by a wider total margin of 721 points to 491. Kan had pledged to weaken the yen and increase public borrowing.

Yesterday’s leadership fight came three months after Kan succeeded Yukio Hatoyama as prime minister and a year since the DPJ took power for the first time by ousting the Liberal Democratic Party from half a century of almost unbroken rule.

Tax Cut

The yen rose to as high as 82.93 per dollar yesterday, its strongest level since May 1995. The Japanese currency has appreciated 14 percent against the greenback since this year’s low of 94.99 set on May 4. It traded at 83.07 at 8:09 a.m. in Tokyo. The Nikkei 225 Stock Average has plunged 16 percent in the same period. The ballot results were announced after the close of Tokyo’s stock exchange yesterday.

Ozawa reiterated last week Japan should unilaterally step in to the currency market and sell the yen even if the impact is limited. Kan’s economic priorities include a corporate tax cut to bolster the fragile economic recovery.

“Even though there’s been a lack of policy action from Kan, the government is going to have to come in and try to prevent the yen from going to extreme uncompetitive levels,” Jerram said. “With Ozawa in or not, they probably understand enough that if the yen goes in the 70 range, the economy is going into recession. Eventually they’ll do something on the exchange rate.”

Sales Outlook

Nomura Holdings Inc., Japan’s largest securities firm, cut its 2011 sales growth and profit estimates for the country’s companies because of the stronger yen in a report on Sept. 6. The brokerage lowered its forecast for year-on-year sales growth of 353 companies, excluding financials, in the Nomura 400 stock index to 4 percent, down from its June estimate of 4.4 percent.

Toyota Motor Corp., the world’s largest automaker and the most-heavily weighted stock in Japan’s Topix index, said in July that every 1 yen gain against the dollar cuts its annual operating profit by 30 billion yen ($360 million). Honda Motor Co., Japan’s second-biggest carmaker, said it loses 16 billion yen.

The Bank of Japan bolstered a bank-lending program and Kan pledged 920 billion yen in fresh stimulus on Aug. 30, two weeks after a preliminary gross domestic product report showed economic growth was less than a fifth of the pace economists estimated.

The Cabinet Office later revised the GDP real growth figure to show an annualized 1.5 percent expansion, compared with the initial estimate of 0.4 percent reported last month.

To contact the reporter on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net

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