By Yasuhiko Seki

TOKYO (MNI) – Prime Minister Naoto Kan’s politically risky bid for
a sales tax hike to fix public finances was strengthened with the
appointment of veteran policymaker Kaoru Yosano on Friday but will still
be difficult, as municipal and provincial elections loom across the
country.

Kan appointed Yosano, 72, as Economic and Fiscal Policy minister as
he reshuffled his cabinet today, a move aimed at breaking the impasses
on starting parliamentary debate on the next fiscal year’s budget.

The reshuffling came after the approval rating for the cabinet
dropped 4 percentage points to 26% in December, a fresh low, from the
previous month’s survey, according to a poll conducted by the Nikkei
business daily.

Its disapproval rating climbed 5 points to 65%, according to the
survey. The poll also shows that the ruling Democratic Party of Japan
saw its approval rating decline a full percentage point to 29%, while
the main opposition Liberal Democratic Party’s fell 2 points to 28%.

“It is far from clear if the reshuffle can shore up the tumbling
support rating and increase the odds for the DPJ to win nationwide local
elections in the spring, given the public’s intolerance to a sales tax
hike,” said Akio Yoshino, chief economist at Amundi Japan Ltd.

Kan called for doubling the consumption tax rate to 10% last June
in order to allow the government to secure a stable funding source for
additional public spending on job creation, which would help Japan move
out of stubborn deflation.

But his abrupt call for a sales tax increase during parliamentary
election campaigns was partly to blame for the DPJ’s loss in the upper
house election in July last year, prompting Kan to tone down his
posture.

Some voters want to see further cuts in “wasteful” spending before
the government raises taxes while others urge the government to secure a
stable source of financing for public pension plans and medical
services, instead of handing out cash to households in the form of child
allowances.

Economists have pointed out that fears among the public about
social safety nets are prompting consumers to save for post-retirement
rather than spending.

This year, Japan will hold unified local elections, which will be
held in April or May once every four years, including elections of the
governor of Tokyo, which often affects the political landscape at a
national level.

Kan has already met revolt from within the DPJ, as Yuko Mori, a
member of parliament, criticized him for picking Yosano, a former LDP
(read conservative) lawmaker, as a key cabinet member.

“If the Kan government can survive the elections, the debate on
overhauling the tax system will start to move forward, but he is likely
to languish between his dream and reality for the time being,” Amundi’s
Yoshino said.

The U.S. rating agency Standard & Poor’s last year downgraded the
outlook for Japan’s sovereign debt rating to negative from stable,
citing the unabated rise in public debt.

By the end of March 2012, the level of outstanding Japanese
government bonds will total Y668 trillion, 138% of projected gross
domestic product, while its total outstanding long-term debt, including
JGBs and municipal bonds, is expected to total Y891 trillion, 184% of
projected GDP, according to an estimate by the Ministry of Finance.

As a result, Japan will remain the most heavily indebted
industrialized nation, dwarfing gross public debt held by Greece, but
better than Zimbabwe, the world’s most-indebted country.

Japan, hypothetically, needs to make interest payment on its
government bonds of Y27.2 billion each day during the year to March
2012, with the annual interest bill seen reaching Y9.9 trillion in the
current term.

“Everybody knows that the tax hike is unavoidable sometime in the
future,” said Amundi’s Yoshino.

But hiking the sales tax could cost a political life.

In April 1989, the 3% consumption tax took effect after years of
debate in parliament. In the same month, then Prime Minister Noboru
Takeshita, who pushed for the introduction of the sales tax, stepped
down in the face of plunging public support and hit by his own financial
scandal.

During the short eight-month period of the non-LDP, grand-coalition
government led by Morimoto Hosokawa, there was a failed attempt in
February 1994 to replace the 3% consumption tax with a new 7% national
welfare tax. The move came under fire from within the coalition, leading
to Hosokawa’s resignation in April 1994.

Later in April 1997, the government of Ryutaro Hashimoto
implemented a sales tax hike to the current 5% that had already been
decided in the previous administration. But the move was ill-fated. The
economy slumped and Hashimoto resigned in July 1998.

“The appointment of Yosano is likely to help reinforce the Finance
Ministry’s resolve for a sales take hike,” said Mitsuru Saito, chief
economist at Tokai Tokyo Securities.

“But given challenges that the DPJ may face at upcoming elections,
it also seems that Kan wants Yosano to play a key role as a mediator
between the DPJ and LDP,” he added.

Yosano served as finance minister in 2009, economic and fiscal
policy minister between 2008 and 2009, and chief Cabinet secretary in
2007, all under governments led by the Liberal Democratic Party.

Yosano is a veteran lawmaker who left the Sunrise Party of Japan on
Thursday. He helped found the small party last year after leaving the
LDP, which is now in the opposition camp after losing power to the
Democratic Party of Japan in 2009.

Financial markets, meantime, showed little reaction to the news of
the minor reshuffling of the cabinet.

The Nikkei 225 Stock Average was down about 0.3% in early Friday
afternoon just after the announcement before ending the day down 90.72
points, or 0.86%, at 10,499.04. The yen was a touch firmer today at
Y82.60 to the dollar.

“The market’s reaction seems to indicate that investors don’t have
high expectations for a change for the better following the reshuffle,”
Yoshino said.

“Assuming that spending cuts and a tax hike will move forward, as
planned, they will cause wild swings in the economy, which is still
mired in deflation. This will be positive for the bond market but
negative for the stock market,” said Susumu Kato, chief economist at
Credit Agricole CIB and CLSA.

While the new cabinet is unlikely to bring about drastic change,
the BOJ may take a breather from political pressure since the DPJ took
power away from the LDP in 2009.

“Even though the BOJ can’t be complacent, given uncertainties about
global markets, it may find it easier to build a stable relationship
with the government, given the past track record for Yosano,” said Mari
Iwashita, chief market economist at Nikko Cordial Securities Co.

While serving as key economic ministers under the LDP regime,
Yosano often expressed sympathy for the BOJ’s monetary policy and rarely
tried to interfere with its decision-making, unlike some DPJ lawmakers.

In today’s cabinet reshuffle, Yukio Edano, who was the ruling
Democratic Party of Japan’s deputy secretary-general, replaced Yoshito
Sengoku, who will become the acting president of the DPJ.

Opposition parties have demanded that both Chief Cabinet Secretary
Sengoku, a close ally of Kan’s, and Land, Infrastructure, Transport and
Tourism Minister Sumio Mabuchi resign over their handling of Japan’s
territorial dispute with China, threatening to boycott budget debate.

Meantime, Banri Kaieda took over as the head of the Ministry of
Economy, Trade and Industry from Akihiro Ohata, who moved into the top
seat at the Ministry of Land, Infrastructure, Transport and Tourism.

Kan, who took office in June, last reshuffled his cabinet and top
ruling party lineup in September, when he picked his close allies to key
posts and further reduced the influence of rival Ichiro Ozawa, who lost
to Kan in the party leadership race at the time.

The DPJ is willing to negotiate with the opposition camp on related
bills for the fiscal 2011 budget, DPJ secretary-general Katsuya Okada
has said. The opposition-controlled upper house could reject those and
other important bills while the DPJ has a majority in the more powerful
lower house of the hung parliament.

tokyo@marketnews.com
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