Ratings Downgrade Gives Japan's Kan a `Tool' to Use in Leadership Battle

Japan’s credit rating downgrade gives Prime Minister Naoto Kan an opportunity to push fiscal restructuring measures, such as raising the country’s sales tax, provided he can ward off attacks over his leadership abilities.

Citing the lack of “coherent strategy” by Kan’s ruling Democratic Party of Japan, Standard & Poor’s yesterday lowered the country’s sovereign debt rating. With the Diet’s upper house controlled by the opposition, there is “a risk” the government won’t be able to pass budget-related legislation, S&P said.

Kan has warned of a “crisis” facing an economy burdened with rising social welfare costs and soaring debt, and called for a debate on increasing the national sales tax to boost revenue. The issue contributed to DPJ’s defeat in upper house elections last year after Kan became Japan’s fifth prime minister in four years.

“Kan can point to this, say his policies are correct and use it as a tool to persuade lawmakers,” said Yasunori Sone, a political science professor at Keio University in Tokyo. “But there are real questions as to how the debate on this will proceed in parliament. And if Kan can’t explain logically what he intends to do, the markets will beat him up.”

Comments Kan made last night after the ratings cut probably won’t help him, Sone and other analysts said. Speaking to reporters more than an hour after S&P made the announcement, Kan said he wasn’t ready to talk because “I’ve just heard about it,” after spending the day in parliament.

‘Unfamiliar’

“I’m unfamiliar with the matter, so please ask me later,” he said. S&P cut Japan’s rating to AA-, the fourth-highest level.

“The opposition will attack Kan for this and his lack of crisis management,” said Kazutaka Kirishima, an economics professor at Josai University, northwest of Tokyo.

Natsuo Yamaguchi, head of the New Komeito party, today criticized Kan in parliament for his comments after the S&P announcement, saying it created a lack of confidence. Kan defended his remarks, saying he wanted to wait until he knew the details of the downgrade.

“What is important for market confidence is for us to maintain the country’s fiscal discipline,” Kan said.

The government is already under pressure to cope with Japan’s debt burden, which is forecast to reach 210 percent of gross domestic product in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development.

Bond Sales Pledge

The administration may break its pledge to limit bond sales to 44.3 trillion yen ($535 billion) a year, Finance Ministry estimates suggest. A revenue gap of 49.5 trillion yen for the year starting April 2012 will widen to 51.8 trillion yen the following year and 54.2 trillion yen the next, according to the ministry.

Kan two weeks ago tapped ex-Finance Minister Kaoru Yosano, a proponent of raising the 5 percent sales tax, to join his Cabinet. The move by Yosano, who last year left the opposition Liberal Democratic Party, outraged his former colleagues and complicated Kan’s efforts to win support for his record 92.4 trillion budget for fiscal 2011.

“At the very least, Kan can use the downgrade as justification for his reshuffle and for bringing questions over Yosano to an end,” Josai’s Kirishima said. “There may be movement in getting the budget-related bills passed.”

To contact the reporter on this story: Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net

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