Jan. 25 (Bloomberg) -- Prime Minister Shinzo Abe takes his plans to pull the economy out of recession to a divided parliament next week, seeking to win support for reshaping the Bank of Japan in favor of aggressive monetary easing.
The Diet opens on Jan. 28 with the Liberal Democratic Party back in power after last month’s lower house landslide. The BOJ this week set a 2 percent inflation target without a deadline, and Abe aims to replace Governor Masaaki Shirakawa in April and two deputies in March with policy makers who support monetary stimulus to revive growth.
Japan’s seventh leader in six years is under pressure to fulfill his pledge to revive the world’s third-largest economy by defeating deflation, boosting spending and weakening the yen. Abe’s BOJ nominees must win approval in the opposition-controlled upper house ahead of July elections for the chamber that also will be a referendum on his administration.
“He has momentum right now and he doesn’t want to lose it because Japan’s public is very fickle,” said Jun Okumura, a senior adviser for the Eurasia Group in Tokyo and former trade ministry official. “The potential obstacle in the Diet is with the BOJ governor and vice-governors. He has to be careful and not overplay his hand while pursuing his growth plans.”
The yen is heading for a record 11th straight weekly loss, after the BOJ’s decision to postpone new measures temporarily halted its decline. Stocks rose, with the Nikkei 225 Stock Average advancing 2.1 percent at 11:10 a.m. in Tokyo.
“I want the BOJ to achieve the 2% price target at the earliest possible date,” Abe said yesterday at a meeting of his economic policy council in Tokyo. “I of course leave the concrete monetary policy measures up to the BOJ, but I expect bold monetary easing.”
The bank on Jan. 22 agreed to the inflation target and to start open-ended asset purchases in January 2014. Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co., said in a research note yesterday that the direction of central bank policy “will likely become clearer” as Abe’s nominees face parliamentary questioning.
“We are optimistic that the new BOJ leadership will steer policy toward exiting deflation faster,” Feldman wrote. “That said, evidence will be needed at each stage, in order to confirm progress.”
The Nikkei index has gained 11.4 percent and the yen has fallen 7.6 percent against the dollar since the LDP’s Dec. 16 victory. The yen traded at 90.40 per dollar at 11:12 a.m. in Tokyo, having hit a postwar record of 75.35 in October 2011.
Investor reaction to Abe’s policies will be a key factor in maintaining public support, ruling party lawmaker Yuriko Koike said in an interview.
“He must make economic revival a certainty,” said Koike, the LDP’s public relations chief. “One barometer will be share prices and the lower yen. It’s not about specific levels, but about maintaining the right direction.”
Abe’s economic revival agenda also includes 10.3 trillion yen ($115 billion) in economic stimulus, extended tax breaks on home mortgages and lower car taxes. The LDP yesterday announced tax policies -- a key part of the package to restore growth without triggering a surge in government borrowing costs because of the nation’s existing debt burden.
To raise revenue, the LDP proposed raising the top income tax rate to 45 percent from 40 and the inheritance tax to 55 percent from 50 percent. It also called for encouraging the transfer of generational wealth by offering reduced tax rates on gifts to children and grandchildren.
“These measures won’t make a big difference to Japan’s fiscal situation,” said Takuji Okubo, chief economist at Japan Macro Advisors and formerly of Goldman Sachs Group Inc. “Raising the top income tax rate is a symbolic gesture to show the wealthy are paying their dues.”
The government should present its BOJ nominees in a package to parliament by the end of next month to allow time for negotiations, LDP upper house parliamentary affairs chief Masashi Waki said in a Jan. 21 interview. Abe lacks a majority in the chamber, so he needs support from the Democratic Party of Japan that he defeated last month, or several smaller parties.
Horse trading has already begun. Abe met Yoshimi Watanabe, leader of the Your Party, last weekend to discuss the central bank posts. Watanabe in a Jan. 17 interview said he would not back any candidate from the BOJ bureaucracy and that the next governor should be an economics PhD with fluent English and management skills. The LDP’s Waki said insistence on such conditions could force the party to seek alternative backers.
“I don’t think someone who is familiar with the BOJ is necessarily bad,” Waki said.
The DPJ has indicated willingness to cooperate after its election defeat last month. DPJ lawmaker Hirofumi Ryu said that while his party wanted to see the nominations in advance, it wouldn’t object to a suitable candidate from the bureaucracy.
“We shouldn’t make a fuss about an individual’s background,” he said. “We need someone who understands the real economy.”
That attitude and signs of economic recovery could help Abe avoid damaging parliamentary battles and set the stage for a successful LDP campaign to win back the upper house it lost in 2007.
“He has to deliver the feel-good factor by June,” said Jeff Kingston, political science professor at Temple University’s Tokyo campus. “If people get a sense that things look to be turning around, I think voters will support the LDP in the upper house election.”
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