New Japan PM faces hurdles on economy, US ties

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(Agencies)
Updated: 2009-09-16 15:35

Japan's new ruling Democratic Party of Japan (DPJ) leader Yukio Hatoyama (R) listens to Hirohisa Fujii, who served as Japan's finance minister from 1993-1994, at the Lower House of Parliament in Tokyo September 16, 2009. [Agencies]

Hatoyama's choice of veteran lawmaker Hirohisa Fujii, 77, as finance minister has soothed some analysts' concerns that the government's spending programmes will inflate an already huge public debt as Japan struggles to emerge from recession and cope with the bulging costs of a rapidly ageing society.

But his choice of Shizuka Kamei, the outspoken head of a tiny coalition partner, as minister for banking supervision and postal services has spooked some experts worried about Kamei's opposition to market-friendly reforms.

"If foreign investors interpret Kamei's position as a slowdown for reform in Japan, stocks could come under pressure and this would be a buying factor for bonds," said Makoto Yamashita, a strategist at Deutsche Securities.

INDEPENDENT DIPLOMACY, BUDGET BATTLES

Hatoyama's vow to steer Japan on a more independent diplomatic course has sparked concerns about possible friction with top ally the United States ahead of his diplomatic debut there next week, where he will meet President Barack Obama.

The US-educated Hatoyama is expected to reassure Obama over ties and perhaps postpone calls for re-negotiation of agreements on US troops stationed in Japan.

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On his return, Hatoyama faces the urgent task of drafting a budget for the fiscal year from next April 1 and finding ways to plug holes in this year's budget caused by sliding tax revenues as Japan struggles out of its worst recession since World War Two.

The new government must balance the need to nurture a recovery and fund its consumer-friendly spending programmes with concerns about a public debt heading towards 200 percent of GDP.

"People aren't fools. We know that money has to come from somewhere but I just don't know where," said 50-year-old businessman Eiji Shimagami.

The Democrats have promised to scrap public works projects and other programmes they consider wasteful and use freed up cash to stimulate consumption through measures such as payouts to farmers and families with children and ending highway tolls.

"They have to put together a budget that clearly shows them as different from the LDP, and the finance minister will be at the centre of that," said Tsuneo Watanabe, a senior researcher at think tank The Tokyo Foundation.

The economy returned to slow growth in the second quarter but still suffers a record high jobless rate and record deflation.

The Democrats have vowed to centralise decision-making in the cabinet, and a new National Strategy Bureau will be tasked with reforming what the Democrats say is a cumbersome policy-making system that relied heavily on recommendations from bureaucrats.

That means the finance minister will likely share responsibility for the budget with former Democratic Party leader Naoto Kan, who will head the new bureau.

Kan, who battled bureaucratic corruption as health minister in the 1990s, is seen as a pragmatic force for change.

Hatoyama must also hold together an awkward coalition with the two tiny parties whose support he needs in parliament's upper house, and may face fall-out from money scandals looming over him and party No.2 Ichiro Ozawa.

Besides conservative People's New Party head Kamei, he will appoint Social Democratic Party leader Mizuho Fukushima to take charge of consumer affairs and policies to boost Japan's very low birthrate.

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