Fiscal, economic rookies concern analysts

Financial experts on Friday were quick to voice their concern over the appointment of Jun Azumi as finance minister, saying the rookie Cabinet member will allow Prime Minister Yoshihiko Noda to push his own fiscal policies and may lack the authority to command the ministry's bureaucrats.

"Azumi's abilities are unknown, and it doesn't seem like he has (financial and economic) experience," said Hisashi Yamada, chief economist at Japan Research Institute Co.

Selecting someone with no ministerial experience for the key post could simply mean that Noda, who was vice finance minister under Yukio Hatoyama, the first Democratic Party of Japan prime minister, and as finance minister in the administration of Hatoyama's successor, Naoto Kan, plans to take charge of the government's financial policies himself, Yamada said.

Azumi, 49, the DPJ's Diet affairs chief under Kan, is considered a potential future leader of the party. The Miyagi Prefecture native graduated from Waseda University and worked at NHK before entering politics in 1993.

Although he served as senior vice minister of defense in Kan's first Cabinet, he hasn't been vocal over his fiscal policies or key economic issues, and his views are largely unknown.

Noda is known as a fiscal hawk who advocates doubling the 5 percent consumption tax by the middle of the decade to help fund ballooning social security costs.

The Cabinet lineup may indicate that the prime minister is ready to flex his muscles and push key policies himself. For example, Noda named Yoshio Hachiro, considered a veteran sidekick, as trade, economy and industry minister.

Hachiro, another ex-DPJ diet affairs chief, is an expert on agricultural policies, having worked at a farming co-op in Hokkaido. Placing him in charge of the ministry that handles exports could indicate Noda is backtracking on Japan joining the Trans-Pacific Partnership agreement, a proposed regional free-trade bloc, but Japan Research Institute's Yamada said that might not be the case.

If Noda is seriously considering steering the government toward joining TPP negotiations, having someone well-versed in agricultural issues such as Hachiro in the Cabinet may "make sense," as he could help sell the free-trade deal to farmers, who are staunchly opposed to Japan joining the TPP, Yamada explained.

Meanwhile, Noda retained Shozaburo Jimi as state minister in charge of postal reform and financial services. Former Deputy Chief Cabinet Secretary Motohisa Furukawa, another rookie Cabinet member, will serve as economic and fiscal policy minister. Furukawa worked as a bureaucrat at the Finance Ministry before he entered politics in 1996.

Noda's team must tackle a long list of issues, including countering the surging yen and reconstructing the disaster-hit Tohoku region while compiling both the supplementary and annual budget plans.

Compiling the budget for the next fiscal year is already facing a big delay because of the March 11 disasters. The submission to the Diet of the third extra budget for fiscal 2011, which will include major funds for the rebuilding of the devastated northeast, is also expected to be delayed until October.

Hisakazu Kato, a professor of economics at Meiji University and an expert on finance, said Noda will likely play a leading role in compiling the budget but added that trying to control everything from the prime minister's office will be tricky.

"Noda was serious about restoring fiscal balance when he was finance minister. Azumi must continue along the same path," Kato said, pointing out that government debt has exceeded ¥900 trillion and that simply issuing more government bonds to make ends meet will not solve the problem.

Whether to hike taxes to secure additional funds for reconstruction work and to cover swelling welfare costs will be a key issue for the new Cabinet.

Azumi has hinted he will follow in Noda's footsteps and ask the public to shoulder part of the costs of rebuilding the disaster-hit areas via higher taxes.

"We must not pass on our debts to the next generation," Azumi told reporters following his appointment Friday. While Noda's new administration will openly discuss fiscal issues with DPJ lawmakers and opposition parties, the public "must shoulder the burden to some extent," he said.

Meiji University's Kato, however, said the real opposition to increasing taxes may come from within the DPJ, even though Noda has tried to avoid an internal power struggle by handing key posts to party members who oppose tax hikes.

"Making progress over raising taxes may come down to a battle against DPJ members who remain opposed," Kato said. But considering Japan's worsening fiscal position, which prompted Moody's Investors Service Inc. last month to lower its credit rating of Japanese government bonds, Noda and Azumi will have to act swiftly, he said.

Regarding market intervention to weaken the surging yen, pundits agreed that Noda's Cabinet will continue the policy of the Kan administration. As Kan's finance minister, Noda was the main player in three foreign-exchange market interventions aimed at weakening the yen.

The relationship between the government and the Bank of Japan is also likely to remain unchanged, as Noda has been working closely with the BOJ and has pledged to continue the cooperation.

But the impact of the new team of fiscal and economic ministers on the economy will depend on Noda's leadership during the early stages of his administration.

"At this point, there are many uncertainties about how this team will work," Japan Research Institute's Yamada said. "It's crucial that Prime Minister Noda delivers a strong policy speech at the Diet, one which will lay out the path along which he intends to lead his administration."

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Euro Declines as Stocks Pare Gains; Yen Tumbles on Concern Japan Will Act - Bloomberg

The euro fell against the majority of its most-traded counterparts, erasing earlier advances, as stocks fluctuated, reducing demand for higher-yielding assets.

The yen slid from almost its postwar record high versus the dollar after Japanese Finance Minister Yoshihiko Noda said he’s ready to take decisive action to stem its strength. The dollar fell earlier amid bets Federal Reserve Chairman Ben S. Bernanke will signal at an Aug. 26 conference in Jackson Hole, Wyoming, the Fed will take further steps to boost the U.S. economy.

“Everyone is focusing on equities and taking their cues from that,” said Andrew Cox, a New-York based currency strategist at Citigroup Inc. “The euro has traded in a very tight range, and we don’t see a catalyst for that to change, at least before Friday.”

Europe’s 17-nation currency slipped 0.2 percent to $1.4374 at 3:05 p.m. in New York, from $1.4397 on Aug. 19. It earlier appreciated as much as 0.3 percent. The yen fell 0.3 percent to 76.74 per dollar, after reaching a post-World War II high of 75.95 Aug. 19. The Japanese currency declined 0.1 percent to 110.31 per euro.

Switzerland’s franc fell versus most major counterparts on speculation the country’s central bank will take move further to curb its gains. New Zealand’s dollar and Sweden’s krona gained against the euro, yen and franc.

The Standard & Poor’s 500 Index was up 0.2 percent after rising as much as 2 percent and falling 0.2 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major trade partners, rose 0.1 percent to 74.072, from 74.009 on Aug. 19.

Bernanke’s scheduled appearance at the Kansas City Fed’s annual economic conference in Jackson Hole comes as U.S. manufacturing weakens, consumer confidence tumbles and the unemployment rate holds above 9 percent.

At last year’s event, he foreshadowed a second round of asset purchases under quantitative easing to improve the economy. The central bank bought $600 billion in Treasuries from November through June.

“Most of the focus today and probably this week is on what Bernanke will and won’t say on Friday,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Bernanke is likely to point to all the tools they have in their toolbox. If he does that, it might prove negative for the U.S. dollar.”

The euro also declined as German Chancellor Angela Merkel reiterated her opposition to issuing euro-area bonds as a way to help solve Europe’s sovereign debt crisis, saying yesterday she won’t let financial markets dictate policy.

Investor calls for euro bonds intensified last week as concern about the debt crisis and a slowing global economy drove down European stocks. The Stoxx Europe 600 dropped to 223.13 on Aug. 19, the least since July 2009.

The premium European banks pay to borrow in dollars through the swaps market increased in a sign lenders may be facing mounting pressure to raise funds in the U.S. currency. It last decreased on Aug. 15.

The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell one basis point, or 0.01 percentage point, to 49.5 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback. Basis swaps allow investors to borrow in one currency and simultaneously lend in another.

Japan’s Noda told reporters in Tokyo today he’s become “more concerned about the worsening of the yen’s one-sided movements.” The government will take “bold actions if necessary and won’t rule out any possible options,” he said.

Japan last intervened in the currency market, selling yen in an effort to halt its climb, on Aug. 4. That drove the currency down as much as 4.1 percent against the greenback. It has since appreciated 2.8 percent.

“We’ve had further comments by Noda and other Japanese officials indicating a lack of comfort with yen strength,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration. “Renewed jawboning has contributed to yen weakness.”

The franc weakened amid speculation the Swiss National Bank will introduce new measures to damp demand for the nation’s currency. The SNB cut borrowing costs to zero earlier this month, increased bank sight deposits almost sevenfold and left the door open for additional measures.

The franc declined 0.5 percent to 1.1355 per euro and was 0.6 percent weaker at 79.01 centimes per dollar.

Most Swiss support intervention by their central bank to curb gains in the franc, the newspaper SonntagsZeitung reported yesterday. The newspaper also said, without naming sources, the Swiss Cabinet expects the SNB to set an exchange-rate target of at least 1.2 francs per euro.

SNB spokesman Walter Meier declined to comment on whether the central bank had intervened.

The franc advanced 10 percent developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen rose 4.9 percent and the dollar is down 2.1 percent.

The franc and yen tend to strengthen during periods of financial turmoil because their export-reliant economies don’t need foreign capital to balance current accounts, the broadest measure of trade.

New Zealand’s dollar strengthened 0.9 percent to 82.58 U.S. cents, and the Swedish krona appreciated 0.4 percent to 6.3630 per U.S. dollar.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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