Aso, Favorite to Lead Japan, May Promote More Public Spending

By Keiko Ujikane
More Photos/Details

Sept. 2 (Bloomberg) -- The potential choice of Taro Aso as Japan's next prime minister could lead to more government spending in a country that already has the world's largest public debt, analysts said.

Aso, secretary-general of the ruling Liberal Democratic Party, is favored by polls to take over from Yasuo Fukuda, 72, who resigned as prime minister yesterday after less than a year in office.

Aso, 67, said last month that the government should consider postponing its goal of balancing the budget by 2011 because Japan may be in a recession. In contrast, Fukuda and Finance Minister Bunmei Ibuki stuck to the pledge even as they prepared an economic stimulus package unveiled last week.

``Aso, whilst not exactly an `old guard' fiscal spendthrift, is certainly not in the camp of the Ministry of Finance-oriented fiscal conservatives who formed the core of Fukuda's Cabinet,'' Peter Wilson, a yen strategist at the London-based subsidiary of Mitsubishi UFJ Financial Group Inc., said in a note.

Fukuda's government on Aug. 29 said it would spend about 2 trillion yen ($18 billion) in measures to boost an economy that contracted at an annual 2.4 percent pace in the second quarter.

The government also announced a one-off tax cut for low income earners that may have to be funded by the issue of bonds later this year should tax revenue fall short of expectations.

Borrow and Spend

``If Aso becomes the next prime minister, the risk will be more spending and borrowing as he focuses on boosting the economy,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd. ``That's negative to the government's fiscal outlook, but there may be limited impact on bonds in the near term as investors are more focused on slowing growth.''

Bonds have rallied over the past three months on concern the economy will keep slowing, pushing the yield on 10-year debt to 1.4 percent on Aug. 29, the lowest since April. The yield fell 1.5 basis points to 1.455 percent at 9:34 a.m. in Tokyo.

In a Jiji Press poll taken last month, Aso was voted the most-suitable candidate for prime minister among all politicians, including the opposition.

His selection as leader ``should push the bond market toward the realization it was coming to anyway -- that more Japanese government bonds will have to be issued,'' said Wilson. ``The risk now is that such populist measures will be larger than before and that Aso may even throw in some additional measures of his own.''

The LDP agreed to include the tax cut for low-income earners in the stimulus plan after lobbying from its junior coalition partner, the New Komeito Party. The government hasn't decided on the scale of the tax cut or how it would be funded.

Tax Revenue Shortfall

Tax revenue was 51 trillion yen in the year ended March 31, 2.9 percent less than the 52.6 trillion yen projected in December, the Finance Ministry said in July.

``There's a possibility that a shortfall in tax revenue will expand to between 3 trillion yen and 4 trillion yen'' this fiscal year, said Kazuhiko Sano, chief strategist at Nikko Citigroup Ltd. in Tokyo. ``It's unavoidable to issue bonds.''

Japan's public debt will total 182 percent of gross domestic product in 2008, according to the Organization for Economic Cooperation and Development.

``Even if all goes according to the government's plan over the medium term, it will be very difficult -- almost impossible -- to achieve a primary budget balance by 2011,'' said Takahira Ogawa, director of sovereign ratings at Standard & Poor's in Singapore. ``There are voices from inside and outside the LDP saying, `postpone a little bit' because macroeconomic conditions are not good.''

Standard & Poor's raised the rating on Japan's long-term, local-currency debt to AA, the third-highest investment grade, in April 2007. Ogawa said he didn't expect Japan to balance the budget by 2011 even before Fukuda's resignation.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net