Kan Tasked With Averting Japan Recession, Debt Crisis

Jan. 7 (Bloomberg) -- Naoto Kan became Japan’s sixth finance minister in 18 months, tasked with preventing a relapse into the nation’s worst postwar recession as deflation threatens to erode companies’ earnings.

Kan, the 63-year-old deputy prime minister, was named by premier Yukio Hatoyama yesterday in Tokyo to replace Hirohisa Fujii, 77. Fujii stepped down over ill health after battling colleagues to prevent a rise in bond issuance by the world’s biggest sovereign debtor.

Kan is seeking to succeed where his predecessors failed: to reverse a contraction in Japan’s economy that’s left gross domestic product, unadjusted for prices, at the smallest since 1991. Any move to ease fiscal restraint and inject greater stimulus runs the risk of unsettling investors and endangering the nation’s credit rating.

“If the economy slows down, we may get a revised budget or additional spending -- we’ll have to see if Kan can handle these issues without losing fiscal discipline,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo, who used to work at the Bank of Japan.

Kan will remain deputy prime minister, Hatoyama told reporters late yesterday. The statement ended days of speculation over the future of Fujii who was hospitalized Dec. 28 for high blood pressure and exhaustion.

Stocks Rise

Investors shrugged off signs of Fujii’s departure, with the Nikkei 225 Stock Average gaining 0.5 percent to 10,731.45 at the close yesterday. Yields on benchmark 10-year notes advanced 1 basis point to 1.335 percent. Nikkei futures expiring in March closed at 10,770 in Chicago yesterday; trading opens today in Singapore at 8:45 a.m. Tokyo time.

Kan’s stature rose as health minister in the 1990s, when he exposed that agency’s role in allowing up to 5,000 Japanese to contract HIV through contaminated blood products. A co-founder of the Democratic Party of Japan, he was later tarnished by revelations he failed to pay his full pension contribution, forcing him to step down as DPJ leader in 2004.

Fujii was the first Cabinet member to depart after the DPJ gained power in September by unseating the Liberal Democratic Party, which dominated the nation’s political landscape for half a century. Hatoyama had asked Fujii, who headed the Finance Ministry in 1993, to postpone retirement and run in the August lower-house election.

Debt Issuance

In the run-up to the Dec. 25 budget unveiling, Fujii had insisted on keeping new bond sales for the next fiscal year around 44 trillion yen ($480 billion), the same as the previous government budgeted for the year ending in March. Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, said it’s unclear whether Kan will hew to such a stance.

“Kan may shift to the fiscal and economic policies that focus more on the economy, compared with Fujii who tends to put more focus on fiscal discipline,” said Kiuchi, who was ranked the nation’s top economist by Nikkei Research Inc. in March.

Japan is poised this year to lose its title as world’s second-largest economy, with China projected by the International Monetary Fund to slot behind the U.S. The country, with a shrinking population and trenchant deflation that’s seen 13 years of price declines since 1994, may face a jump in its debt to 246 percent of GDP by 2014, according to the IMF.

Sony Corp. Vice Chairman Ryoji Chubachi warned this week that deflation, squeezing companies’ earnings, may cause a “double-dip” recession this year.

Deflation Fight

The deputy prime minister has been vocal in recent months in discussing the nation’s economic challenges, pressing the Bank of Japan to step up its efforts to end deflation, and favoring a retreat in the yen’s exchange rate that threatened exporters.

On Dec. 17, he said that a weaker Japanese currency was “favorable” and that he was glad that it had fallen from the previous month’s 14-year peak.

Fujii roiled traders after taking office in September by indicating he favored a stronger yen, as part of the DPJ-led government’s campaign to bolster households’ spending power. He said in September it’s “absurd” that a lower exchange rate helps exporters, and that market interventions can “destroy a free economy.” After the yen soared, he warned in November that Japan was ready to act to stem “abnormal” currency movements.

“Kan is likely to continue the shift from strong to weak yen policy,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi in London. “On balance we believe Kan’s appointment will be at the margin yen-negative -- through raising political and fiscal uncertainty.”

Yen Trading

Japan’s currency dropped 0.8 percent to 92.45 per dollar as of noon in London, about 9 percent lower than its 14-year high of 84.83 reached on Nov. 27. The Finance Ministry, through the Bank of Japan, is in charge of deciding on yen purchases or sales, and officials haven’t intervened since 2004.

One of Hatoyama’s campaign pledges was to lessen the power of bureaucrats and give elected politicians greater sway over policymaking. Fujii, a veteran Finance Ministry budget examiner, had been perceived as a less combative pick for that post. By contrast, Kan took on bureaucrats as health minister in 1996, forcing them to surrender documents on the blood scandal.

The new finance chief was born in Yamaguchi, western Japan, and went to high school in Tokyo. He earned a bachelor’s degree in applied physics at the Tokyo Institute of Technology, and became a patent attorney before entering politics.

DPJ Co-Founder

Kan and Hatoyama helped found the DPJ in 1998. Kan told reporters in July 1996 that he was seeking “to work with politicians who will control the executive branch with the backing of the people.”

Remaining as deputy premier risks stretching Kan’s portfolio too far, Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, said before the appointment.

Hatoyama earlier yesterday urged ailing Fujii to stay in his post. He later told reporters that “given concerns over his health, there was nothing else to be done. I had to accept his resignation.”

“It goes without saying that Finance Minister Fujii was the primary person in formulating the budget, but Deputy Prime Minister Kan was closest in giving support,” Hatoyama said. “I have no worries in Kan being able to do this.”

The personnel reshuffle comes as Hatoyama’s popularity falls. His Cabinet had an approval rating of 50 percent in a Dec. 25-27 poll by Nikkei Inc. and TV Tokyo Corp., down from 75 percent backing in mid-September.

The Diet is scheduled to convene later this month, when Kan will face lawmakers’ questions over the proposed budget. Finance ministers and central bank governors from the Group of Seven industrial nations are scheduled to gather in Canada next month.

Kan told reporters yesterday he will tackle “various issues aggressively,” and pledged to make sure the proposed 92.3 trillion yen 2010 budget is passed by the Diet.