Cement Magnate’s Son Aso Takes Reins of Japanese Economy

Japan's Newly Named Finance Minister Taro Aso
Taro Aso, Japan's newly named deputy prime minister and minister for finance and financial services. Photographer: Kiyoshi Ota/Bloomberg

Taro Aso, son of a cement magnate and a champion of pork-barrel spending when prime minister, became Japan’s sixth finance chief in three years, auguring expanded fiscal stimulus in the world’s third-largest economy.

Aso, 72, will also serve as deputy prime minister and financial services minister in Prime Minister Shinzo Abe’s administration, Chief Cabinet Secretary Yoshihide Suga said in Tokyo yesterday. Fumio Kishida is foreign minister, while Akira Amari was named economy minister.

The finance minister’s first task will be to deliver on his party’s pledge of a “large-scale” supplementary budget to stimulate the economy, which is forecast to shrink for a third straight quarter. At issue will be averting any sell-off in the bond market as the nation grapples with debt in excess of twice the size of gross domestic product and as Aso calls for a new plan to restore fiscal health.

“Aso’s challenge will be to pursue an expansionary fiscal policy without triggering a rise in bond yields,” said Mari Iwashita, Tokyo-based bond strategist at SMBC Nikko Securities Inc. “It seems the LDP isn’t paying much attention to the bond markets. It’s possible that ratings companies may signal a downgrade as a warning.”

The Liberal Democratic Party must establish its own “framework” to curb spending and debt expansion, Aso told reporters early this morning after the Cabinet was sworn in by Emperor Akihito. Aso said he won’t adhere to limits made by the previous government to cap new bond issuance for the fiscal year ending March 31 at 44 trillion yen ($514 billion). He told reporters today he wants to compile economic stimulus measures by Jan. 7.

‘Completely Failed’

“We can see that Japan has completely failed to overcome deflation during the past three years,” Aso said. “Our priority is to ensure Japanese people can perceive that the economy is improving.”

Japan’s sovereign bond risk increased in the run-up to the assumption of power by the LDP, which won elections for the lower house of Parliament Dec. 16. The cost to insure the debt from non-payment for five years rose 14.5 basis points to 86 basis points as of 3:04 p.m. in Tokyo yesterday, from 71.5 basis points Nov. 13, according to data provider CMA. That’s on course for its highest close since Sept. 26, the data show.

The incoming leadership team has championed both fiscal and monetary stimulus, along with a weaker exchange rate to end Japan’s deflation and restart growth. Shigeru Ishiba, secretary general and policy chief of the LDP, said last week that a yen of 85 to 90 per dollar was “adequate.”

‘Slow Response’

Aso said that the Bank of Japan has been “extremely sensitive to inflation” even as the Japanese economy has been mired in more than a decade of price declines.

“The BOJ has been extremely slow in responding to deflation,” he said at the Finance Ministry today.

Abe, who spoke late yesterday in a televised press conference, said that his government intends to restore “strong” economic growth. Top priorities include bold monetary policy and a flexible fiscal policy, he said.

“We will compile a large-scale budget because our government’s mission is to overcome deflation,” Abe said. “Countries that give up on growth have no future.”

The currency yesterday slid through 85 for the first time since April 2011, adding to losses since Abe in mid-November called for unlimited easing by the BOJ. It was at 85.68 per dollar as of 4:55 p.m. in Tokyo. The Nikkei 225 Stock Average closed up 0.9 percent, heading for its seventh week of gains. Benchmark 10-year bond yields rose to the highest in nearly two months yesterday.

Aso is one of nine former Cabinet ministers to return to government after the LDP won elections this month only three years after surrendering a half-century grip on power.

Former Olympian

During his 12 months as prime minister through September 2009, the one-time Olympian compiled three extra budgets worth about 20 trillion yen, abandoned a target to balance the budget by March 2012 and distributed a 12,000 yen-per-person cash handout.

Among the elements in Aso’s record 15.4-trillion yen stimulus package unveiled in April 2009 was 12.4 billion yen to get rid of fishing gear dumped by foreign boats and 400 million yen for cutting down trees to keep “beasts and birds” out of towns.

A history of verbal gaffes raises the risk of miscues to financial markets as Aso takes the Finance Ministry’s helm. Past blunders include saying that he wanted Japan to be a country where “rich Jews” would want to live, and that mothers need to be disciplined more than their children.

‘Tony Brown’

He referred to former British premier Tony Blair as “Tony Brown” during a speech at the World Economic Forum in Davos, Switzerland, and called for the emperor to visit Tokyo’s Yasukuni Shrine, seen in Asia as a symbol of Japanese military aggression.

His boss, Abe, corrected himself on Dec. 20 after seeming to indicate he had advance knowledge of a BOJ decision.

“Aso has a record for slips of the tongue, and we need to be careful about what he says as finance minister,” said Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd and a former Bank of Japan official. “His remarks may make financial markets volatile, such as by signaling intervention even if there is no plan for such action.”

Japan has refrained from intervening in the foreign-exchange market this year after record sales of yen in October 2011 under the former government of the Democratic Party of Japan.

‘Appropriate Level’

Economy Minister Amari said at a press conference early this morning that the yen at around 85 per dollar is “approaching a fairly appropriate” level, adding that the government must ensure the weakening trend continues. He also said he would consider attending Bank of Japan policy meetings.

LDP lawmakers Yuko Obuchi, the daughter of a former prime minister, and Shunichi Yamaguchi will be vice-finance ministers, Abe’s office said in a statement today. Yasutoshi Nishimura, who as shadow finance minister advocated changing the law governing the BOJ’s independence, will be vice minister at the Cabinet Office in charge of economic affairs.

The new Cabinet inherits stewardship of an economy contracting from a slide in exports and moribund domestic demand. GDP fell at an annualized 3.5 percent pace in July through September, while the median estimate of analysts surveyed by Bloomberg News is for a 0.5 percent contraction this quarter.

Exports Slide

Exports slid for a sixth month in November, with Europe’s crisis continuing to pose a drag on shipments and a diplomatic dispute with China over islands claimed by both nations hammering demand for Toyota Motor Corp. and Nissan Motor Co. products.

As foreign minister, Kishida will be tasked with managing the ties with China, which said yesterday that it hopes the incoming government will meet it half-way. The countries have confronted each other with civilian and coast guard vessels for months over islands known as Senkaku in Japan and Diaoyu in China.

China hopes Japan will stick to its “path of peaceful development and play a positive role in maintaining peace in Asia,” Foreign Ministry spokeswoman Hua Chunying told a briefing in Beijing yesterday.

Fiscal stimulus may help bring an end to the recession at the risk of adding to Japan’s borrowing. From 2008 to 2009, covering Aso’s time as prime minister, Japan’s debt rose from around 170 percent of gross domestic product to about 190 percent. At the end of last year it was more than double the size of the economy.

Lehman Shock

Aso’s use of fiscal stimulus as prime minister was a “bold decision” to mitigate the impact of the global financial crisis, said Richard Koo, chief economist at Nomura Research Institute Ltd. in Tokyo, who has known Aso for more than 10 years and is the author of a book on the nation’s post-bubble economy.

“Those who deride him as a big spender forget that he was prime minister when the Lehman shock happened,” he said, referring to the September 2008 demise of Lehman Brothers Holdings Inc. that tipped the world into a recession. “Before the crisis, we were working on issues such as accelerated depreciation allowances and generous investment tax credits. Those are the fiscal measures we need right now, not just bridges and roads.”

Aso, a member of Japan’s 1976 Olympic skeet shooting team, was the nation’s leader when the LDP lost its grip on power in 2009. He studied at Stanford University and the London School of Economics and was foreign minister during Abe’s first stint as prime minister in 2006-2007.

Aso Cement

“We must consider what needs to be done to beat this recession and end deflation,” Aso said while campaigning with Abe in Tokyo on Dec. 15. “We need more spending” and monetary easing from the BOJ, he said.

A Catholic, Aso joined the family company Aso Industries in 1966 and rose to become president and CEO of Aso Cement Co. only seven years later before entering politics in 1979, according to his website.

Construction-industry shares have climbed in the run-up to the new administration, with Kumagai Gumi Co. surging more than 55 percent since mid-November.

With regard to monetary policy, the LDP and its New Komeito coalition ally yesterday agreed on a 2 percent target for inflation, auguring increased pressure on the Bank of Japan to expand its asset-purchase fund. Consumer prices excluding fresh food, a benchmark used by the BOJ, haven’t risen as much as 2 percent for any year since 1997, when Japan last raised the national sales tax.

Sales Tax

Aso will oversee whether the government follows through on a deal with the previous administration to boost the sales tax again. Aso reiterated today that the economy should improve before implementing the planned doubling of the sales tax. The levy is set to increase to 8 percent in April 2014 and 10 percent in October 2015 from the current 5 percent.

The LDP said in its election manifesto that it would halve the ratio for the fiscal deficit, excluding debt financing costs, relative to GDP by 2015. The ruling party aims to achieve a so-called primary surplus by 2020.

“Abe has said he’s confident that Japan can avoid a jump in bond yields even if inflation starts to surge as long as the central bank buys lots of debt,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “But we haven’t seen any country that has succeeded in such a challenge.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE