Noda Faces Short Honeymoon in Drive to Increase Taxes After Succeeding Kan

Yoshihiko Noda becomes Japan’s sixth leader in five years, seeking a consensus to raise taxes to pay for rebuilding from the March earthquake and nuclear disaster and reduce the world’s largest debt. He’s unlikely to get it.

The lower house of parliament elected Noda prime minister today after the ruling Democratic Party of Japan yesterday chose him to succeed Naoto Kan. As Kan’s finance minister, Noda advocated an increase in levies to help finance disaster reconstruction, something opposed by his challengers in the race.

The DPJ’s split over funding will test the political skills of a five-term lawmaker who built his reputation by meeting with constituents at local train stations every weekday for a quarter-century. At stake for the world’s third-largest economy is paying for rebuilding without sacrificing investor confidence in the nation’s creditworthiness.

“I don’t think he’s going to get much of a honeymoon,” said Koichi Nakano, a political science professor at Tokyo’s Sophia University. “Noda will get a bump in the polls, but the external conditions remain hostile and there are divisions over what to do about the economy.”

Government reports today showing rising unemployment and falling retail sales served as reminders to the challenges he faces. The jobless rate rose to 4.7 percent and payrolls fell by 40,000 in July from June, while retail sales slid 0.3 percent.

Situation ‘Severe’

Speaking today after Kan’s last Cabinet meeting, Noda said he wants to pass a third post-disaster stimulus plan quickly. Japan’s fiscal situation is “severe,” and the country can’t postpone revamping the tax and social welfare system, he said.

Investors reacted positively to Noda’s victory on speculation he’ll pursue fiscal changes needed to deal with a debt of about 200 percent of gross domestic product.

Japan’s bonds were little changed after rising yesterday, when 10-year yields dropped two basis points to 1.010 percent. Stocks rose for a fourth day, with the Nikkei 225 (NKY) Stock Average adding 1.3 percent. The yen was unchanged at 76.88 per dollar.

“Global investors are wondering about the sustainability of Japan’s finances,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official. “Noda is a much better pick compared with other candidates in terms of fiscal discipline. The results may be favorable to the Japanese bond market.”

Early Struggles

Noda, 54, is the DPJ’s third leader since it took power two years ago. He defeated Trade Minister Banri Kaieda in a runoff after former Foreign Minister Seiji Maehara, whom polls showed was the preferred choice, was rejected on the first ballot.

The grandson of farmers, Noda recalled yesterday in his speech to legislators before the vote that his parents were too poor to pay for their wedding reception. He himself at one point couldn’t afford clothes for his young children, he said. He compared his appearance to that of a loach fish, a freshwater bottom-feeder.

“My approval ratings may not rise as prime minister,” Noda said. “But I will work and sweat to push down-to-earth politics.” At a press conference later, he said “there are issues of timing” in deciding which taxes to increase, adding he will wait for a government panel to release recommendations.

His selection comes less than a week after Moody’s Investors Service cut Japan’s credit rating one step to Aa3, citing political instability and “weak” prospects for economic growth that will make it difficult for the government to contain its debt burden.

S&P’s View

Standard & Poor’s is unlikely for now to change its outlook for Japan’s credit rating following Noda’s election, said Takahira Ogawa, director of sovereign ratings at the company in Singapore.

“The key will be how long the new Noda administration lasts, and whether Noda will change his views as prime minister from when he was finance minister,” Ogawa said.

A fan of combat sports, including boxing and wrestling, Noda had no senior cabinet experience when he became the youngest finance minister in two decades in June 2010. He served as deputy finance minister starting in September 2009, when the DPJ took office. Like predecessor Kan and unlike Japan’s four previous leaders, he is not a descendant of a previous prime minister.

Along with inheriting an economy that’s shrunk for three straight quarters, Noda faces the challenge of rebuilding support for a party that has seen its poll ratings eroded by political infighting amid the nation’s deepest postwar crisis.

No Retreat

Noda said in an Aug. 28 candidate debate that the DPJ had let the country down, and called for honoring Kan’s proposal to raise taxes to pay for reconstruction and shore up the welfare system. He said on Aug. 13 that there should be no retreat from a pledge to double the sales tax to 10 percent by the middle of the decade.

“Noda is the most aggressive about tax increases among the candidates, so his win would fuel expectations that fiscal reforms will progress,” said Kenichi Kawasaki, senior political analyst at Nomura Securities Co. in Tokyo.

The government plans to spend 19 trillion yen ($248 billion) over the next five years to rebuild from the earthquake and tsunami that left 20,000 people dead or missing and devastated the country’s northeast. Included in the total is 6 trillion yen from two supplementary budgets enacted under Kan.

Policy makers have also faced a strengthening currency that’s given companies an incentive to shift jobs and production overseas. Noda has overseen three interventions in the market in the past year to address the yen’s appreciation. It has risen about 19 percent against the dollar since Kan took office in June last year, reaching a postwar record of 75.95 on Aug. 19.

Restoring Public Faith

Noda, Japan’s 31st prime minister since World War II, will have to restore public faith in a party that hasn’t lived up to campaign pledges to address the challenges of an aging society. Earlier legislation scaled back subsidies for childcare and the party failed to overhaul welfare spending.

The DPJ’s support was at 21 percent, according to a Yomiuri newspaper poll published yesterday. The opposition Liberal Democratic Party, which governed for half a century before being ousted by the Democrats in 2009, got 23 percent, while 46 percent of the public supported no party. The paper polled 1,055 voters Aug. 27 and 28 and didn’t provide a margin of error.

“As to whether the public feels the government change two years ago was good or bad, we’re standing at a cliff,” Noda said on Aug. 28.

Kan, 64, announced his resignation last week, hurt by public discontent with his handling of the temblor and the nuclear meltdown that followed it at the Fukushima Dai-Ichi power plant.

Noda will be the first prime minister who attended the Matsushita Institute of Government and Management, established in 1979 by Panasonic Corp. (6752) founder Konosuke Matsushita to raise a new generation of leaders.

A native of Chiba prefecture east of Tokyo, Noda went to his neighborhood train station every weekday to discuss his policies with constituents until he became finance minister last year.

“Noda was the most stable and steady of the candidates,” said Yasunori Sone, a political science professor at Tokyo’s Keio University. “He may be able to gain approval over time.”

To contact the reporters on this story: Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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

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