Japan’s Kan Poised to Resign as Bills Pass

Japan’s parliament passed two pieces of legislation that Prime Minister Naoto Kan said were conditions for him to resign as early today, setting up a succession battle that will play out by early next week.

The Diet’s upper house passed bills to subsidize renewable energy and authorize the sale of deficit bonds, and Kan told ruling party executives he will resign, according to a lawmaker who attended the meeting. Former Foreign Minister Seiji Maehara, 49, is the public’s favorite to replace Kan and will run against Finance Minister Yoshihiko Noda, 54, Trade Minister Banri Kaieda, 62, and Agriculture Minister Michihiko Kano, 69.

The winner will inherit an economy burdened by three straight quarters of contraction, the world’s largest debt and a currency at a postwar high that threatens to undermine an export-driven recovery. Maehara has called on the Bank of Japan to expand its balance sheet to fight deflation and advocates lowering trade barriers to boost economic growth.

“Maehara is untainted by the last five months of Kan’s administration and the disaster response,” said Jun Okumura, a senior adviser at the Eurasia Group in Tokyo, who added that Maehara will also benefit from being the public’s favorite among Democratic Party of Japan candidates to succeed Kan in opinion polls. “Many DPJ Diet members will be making their choice with the next election in mind.”

The Yomiuri newspaper said Kan will publicly announce his resignation at a 2 p.m. meeting of ruling party lawmakers.

Japan Disaster

Five days after Maehara quit his post on March 6, an earthquake and tsunami wrecked Japan’s northeast, killing at least 15,000 people and causing a nuclear disaster that forced 60,000 from their homes. The resignation of Kan, blamed by the opposition and DPJ colleagues for a slow reaction to a meltdown at an atomic power plant, paves the way for an Aug. 29 DPJ leadership race.

Japanese stocks swung between gains and losses ahead of a speech by Federal Reserve Chairman Ben S. Bernanke today, with the Nikkei 225 (NKY) Stock Average little changed at 1:25 p.m. in Tokyo. The yen rose 0.2 percent to 77.32 per dollar. Japan’s currency has gained about 18 percent since Kan took office on June 8, 2010, while the Nikkei has declined 8 percent in the same period.

The Yomiuri said the prime minister would announce his decision to step down at a meeting today of DPJ lawmakers, without saying where it got the information. Also running are former Transport Minister Sumio Mabuchi and ex-Environment Minister Sakihito Ozawa.

Party Divide

Whoever prevails will face a party divide over whether to raise taxes to pare debt and rebuild, after Moody’s Investors Service this week cited political volatility as one reason for cutting the country’s credit rating. Maehara, who would be the youngest premier since World War II, said in a June interview that deflation should be defeated before raising taxes.

Noda supports tax increases to pay for reconstruction as well as doubling the sales levy to 10 percent by the middle of the decade to contain the debt burden. Kaieda and Kano have yet to specify their positions.

Indicating a willingness to break with entrenched policies, Maehara as transport minister pushed Japan Airlines Co. to file for bankruptcy in 2010 after the carrier had received emergency loans three times from previous governments headed by the Liberal Democratic Party. JAL is expected to report an operating profit this year after cutting flights, staff and planes.

‘Alleviated’

“We can expect political instability to be alleviated somewhat if Maehara becomes prime minister,” said Junko Nishioka, chief economist at RBS Securities in Tokyo and a former Bank of Japan official. “He is regarded as someone with leadership and understands the importance of making progress on fiscal issues.”

Maehara was the most popular choice to become the next prime minister according to a Yomiuri poll published Aug. 8, with 21 percent support. Noda had 5 percent. One voter in five had no preference.

Noda has been Kan’s point man in promoting economic recovery. The government plans to spend 19 trillion yen ($246 billion) to rebuild from the disaster over the next five years. Like Maehara, Noda attended the Matsushita Institute of Government and Management, established in 1979 by Panasonic Corp. (6752) founder Konosuke Matsushita.

The new prime minister will also have to shape the country’s energy policy, after Kan announced that Japan will reduce its dependence on atomic power following the nuclear fallout from Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant.

Maehara told the Shukan Asahi magazine this month that his views on atomic energy are largely in line with Kan, and that Japan should aim to phase it out within the next 20 years.

Backroom Deals

Voters have soured on the DPJ since it ousted the LDP from 50 years of almost unbroken rule in August 2009. The party has failed to fulfill its pledge to extract the country from two decades of economic stagnation, while repeating the LDP’s revolving door of leaders. Kan’s successor will be the third DPJ chief in two years.

With the DPJ leadership race likely to be determined by backroom deals, public popularity doesn’t ensure Maehara will win. Party powerbroker Ichiro Ozawa, who attempted to oust Kan in June, retains the loyalty of more than 100 of the 407 DPJ legislators. Ozawa won’t support Maehara’s bid after consulting yesterday with former Prime Minister Yukio Hatoyama, the Yomiuri and Asahi newspapers reported, without citing anyone.

‘Balance of Power’

“Ozawa may hold the balance of power,” said Steven R. Reed, a professor of political science at Chuo University in Tokyo. Maehara must try and placate Ozawa’s followers without seeming under his influence or risk losing public support, Reed added.

Maehara quit as foreign minister after admitting he received 250,000 yen from a South Korean resident of Japan in violation of laws barring political contributions by foreign nationals. He also stepped down as DPJ head in 2006 after a colleague falsely accused another lawmaker of accepting a bribe.

“His leadership record is mixed,” said Koichi Nakano, a political science professor at Sophia University in Tokyo. At the same time, Maehara “doesn’t belong to the old school of Japanese politics, which is to his advantage,” he said.

To contact the reporters on this story: John Brinsley in Tokyo at jbrinsley@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

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

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