Japan’s January 14 cabinet reshuffle – the third since Prime Minister Naoto Kan took office in June – could be good news for investors. As Nomura analysts point out: “We think the January 14 cabinet reshuffle will have a positive impact on Japanese equities as a whole, as it indicates to us the Japanese government is taking an active stance towards normalising Diet proceedings and promoting the Trans-Pacific Partnership (TPP).”
The equities call is a typical statement about how daily news drives the swings of any bourse. Normalised Diet proceedings is something we’d all love to see, but let’s face it, Kan is the fifth premier since 2006 and if there’s a norm it is regular cabinet shuffles. Indeed, Japanese press reported that the cabinet changes were greeted with indifference by the man on the street in Tokyo.
However, Japan joining the TPP could actually be a real step towards change.
The TPP started out as a free-trade agreement in 2006, forged between Brunei, Chile, New Zealand and Singapore. Full-scale negotiations are under way among the original four plus Australia, Malaysia, Peru, the US and Vietnam to expand the framework. It is envisaged that the TPP will require member countries in principle to reduce all tariffs to zero within 10 years.
Many of Japan’s business leaders say their nation must join the TPP or suffer a competitive disadvantage, but the politically powerful farmers are opposed because of worries that cheaper imports, especially rice, would ruin them. Take another look at the list of nine potential members and you see that major agricultural exporters such as Australia, the US and Vietnam are part of this group.
Japan decided in November to consult with these nine countries to judge whether to join the negotiations. A country wishing to join needs to secure the consent of all nine countries through bilateral talks. Japan has already held bilateral talks with Australia, New Zealand and Singapore to get further details about the TPP.
Japan and the US started their first talks last Thursday (January 13) during a two-day Japan-US trade forum. Foreign minister Seiji Maehara reportedly indicated that Tokyo should step up efforts to join the TPP talks, saying the agricultural sector has lost strength and now accounts for only 1.5% of Japan's gross domestic product.
Nonetheless, the agricultural sector is still a powerful lobbying group and support ratings for Kan are hovering around 25%. Indeed, he has told Japanese media that he understands why a slew of politicians have left the prime minister's job in recent years. (This should have been no real eureka moment, the more difficult thing to understand is why anyone would actually want the job.)
Kan evidently wanted it in part because he thinks he can change Japan. He has said that he wants to make 2011 the start of an era of Japanese free trade and specialists expect Japan to reach a decision on entering the TPP by June. Nomura wrote in its Friday research report on the cabinet reshuffle that: “If it becomes evident that Japan will join the TPP, we think non-resident investors in particular will gain the impression that the Japanese government is serious about reforming its economic structure.”
The new cabinet
Kan appointed Banri Kaieda, a supporter of Japan joining the TPP, as his new trade minister. Kaieda was previously the minister of state for economic and fiscal policy. He replaces Akihiro Ohata, who has been reluctant to back the trade pact. Ohata takes on the role of the minister for land, infrastructure, transport and tourism – where he shouldn’t have too much influence over the TPP decision. Koichiro Gemba, another proponent of the TPP, has retained his role as minister of state for national policy.
Kan also selected two former finance ministers who are advocates of fiscal reconstruction: Kaoru Yosano has been appointed economic and fiscal policy minister, while Hirohisa Fujii has become the deputy chief cabinet secretary. Yosano, a 72-year-old lawmaker who supports raising the sales tax to meet climbing social security costs, is expected to focus on the details of rebuilding Japan’s economy. Fujii, a former finance ministry bureaucrat, is likely to work closely with the ministry to push through the policy goals.
The fiscal situation is a well-reported mess and the issuance of new bonds to finance the fiscal 2011/12 budget will be a key issue, providing the budget drafted last month by the government and related bills actually clear the Diet. In order to pass bills needed to implement the budget, Kan must either forge a simple majority in the upper house with help from the opposition or build a two-thirds majority in the lower house to override the upper chamber.
The Nomura analysts concluded in their report: “While many uncertainties remain, we see a decreased risk of a logjam in deliberations on the budget and budget-related bills when the Diet convenes for its ordinary session, possibly as early as 24 January.”
