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Kan Replacements Emerge as Moody’s Cautions on Japan’s Debt

Contenders to Replace Kan Emerge as Moody’s Warns
A combination photograph shows, clockwise from top left, Seiji Maehara, former foreign minister, Yoshihiko Noda, finance minister, Sumio Mabuchi, former land, infrastructure, and transport minister, Michihiko Kano, agriculture, forestry and fisheries minister, Sakihito Ozawa, former environment minister, and Banri Kaieda, economy, trade and industry minister. Photographers: Haruyoshi Yamaguchi and Tomohiro Ohsumi/Bloomberg

Japan’s Finance Minister Yoshihiko Noda joined former Foreign Minister Seiji Maehara in vying to become the next prime minister, as the downgrade of the country’s credit rating adds pressure on the country’s next leader to deal with the world’s largest public debt burden.

The Democratic Party of Japan candidates to replace Prime Minister Naoto Kan sent their representatives to the group’s headquarters today in Tokyo before an Aug. 29 vote for a new party chief. Trade Minister Banri Kaieda, Agriculture Minister Michihiko Kano and former Transport Minister Sumio Mabuchi were among those who sent aides to the meeting on election ground rules.

Kan, whose popularity plunged after the March earthquake and nuclear crisis, will quit as early as tomorrow after passage of energy and funding bills. Political instability helped prompt yesterday’s credit rating downgrade by Moody’s Investors Service, and Japan’s sixth prime minister in five years will face the same challenge that stymied Kan -- opposition to tax increases to rebuild disaster-ravaged areas and pay down debt.

“The next leader probably won’t have the guts to raise taxes to fund reconstruction because he’ll be more worried about losing popularity than Japan’s fiscal situation,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo. “There’s nothing that implies we are on the right track to achieving fiscal health.”

Other Candidates

Ex-Environment Minister Sakihito Ozawa, lawmaker Shinji Tarutoko, former Chief Cabinet Secretary Hirofumi Hirano and lawmaker Hideo Hiraoka also sent representatives to the meeting at DPJ headquarters. The winner will become prime minister because the DPJ has a majority in the lower house of parliament.

Moody’s cut Japan’s debt rating one grade to Aa3, with a stable outlook. Political turmoil has “prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” the ratings agency said.

“The imminent change in the party’s presidency and the election of a new prime minister reflect the factious nature of the country’s politics,” Moody’s said.

The yen rose today after yesterday shrugging off a $100 billion package designed to cope with its persistent strength. The currency strengthened 0.1 percent to 76.90 per dollar at 11:02 a.m. in Tokyo. Japanese stocks rose, with the Nikkei 225 Stock Average up 1.4 percent after yesterday’s 1.1 percent drop.

Post-War High

The government plans to spend 19 trillion yen ($248 billion) over the next five years to rebuild from the disaster that left 20,000 people dead or missing and another 80,000 homeless, including 6 trillion yen Kan compiled in two stimulus packages.

Japan has amassed a debt of 943.8 trillion yen after two decades of spending to boost an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. In addition, the yen’s rise last week to a post-war high against the dollar threatens exports, a main driver of economic growth.

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

Reconstruction Stance

Maehara, who said in a June interview that the next reconstruction package should be “at least” 10 trillion yen, also said deflation should be defeated before increasing taxes.

The lack of specifics from the candidates in how Japan will deal with its fiscal situation may have contributed to the timing of the Moody’s announcement, analyst Takahide Kiuchi said.

“By doing the downgrade on the eve of the leadership election, it looks like Moody’s is trying to send a message to the new administration to work on restoring fiscal health,” Kiuchi, chief economist at Nomura Securities in Tokyo, said.

The Diet’s upper house will vote tomorrow on bills to subsidize renewable energy and another authorizing the sale of deficit bonds to finance about 40 percent of this year’s 94.7 trillion yen budget.

Maehara, 49, was the most popular choice to become the next prime minister according to a Yomiuri poll published Aug. 8, with 21 percent support, while Noda had 5 percent. One voter in five had no preference. Kan’s approval rating fell to 18 percent from 24 percent in July, the survey showed. The paper surveyed 1,059 eligible voters and gave no margin of error.

“The downgrade puts pressure on the new government,” said Shirakawa. “But it’s still hard to imagine that they can show some signs of improvement given the political disarray.”

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