Japan's new cabinet more friendly to BOJ: analysts

 @ibtimes on August 27 2007 2:45 PM

A key backer of central bank independence won an important role in Japan's new cabinet on Monday, perhaps making it easier for the Bank of Japan to raise interest rates, analysts said.

Kaoru Yosano, 69, was appointed chief cabinet secretary, a role that involves liaising between government parties and serving as top government spokesman.

Newly appointed Finance Minister Fukushiro Nukaga, 63, is also not known to have put direct pressure on the Bank of Japan in recent years, while an open critic of the bank was removed from a senior post in the ruling Liberal Democratic Party (LDP).

When economics minister last year, Yosano was among the most vocal supporters of the BOJ's push to raise Japan's very low interest rates, even as fellow government politicians openly criticized the central bank for raising rates too prematurely.

Yosano has been known to acknowledge the BOJ's independence and will likely help enhance communication between the central bank and the government, said Izuru Kato, chief economist, at Totan Research.

Nukaga's history on the Bank of Japan is less clear-cut. In 2004, as policy chief of the LDP, he told Reuters in an interview that monetary policy should remain accommodative.

But given that the comment was made when Japan was mired in deflation, Nukaga is unlikely to keep up the same rhetoric now, analysts said.

In addition, analysts noted that a known BOJ critic, former LDP secretary general Hidenao Nakagawa, did not get a key post after the cabinet reshuffle. His party job was taken by outgoing Foreign Minister Taro Aso.

Aso, the new secretary general of LDP, doesn't seem to be as tough on the BOJ as Nakagawa, said Mamoru Yamazaki, chief economist at RBS Securities.

Some lawmakers in the LDP, including Nakagawa, have openly put pressure on the central bank to keep interest rates low to support the economy.

The BOJ has said it needs to gradually raise interest rates to more normal levels from the current 0.5 percent, even though inflation is absent from the economy, as keeping rates too low could over-stimulate the economy, storing up problems for later.

Yosano is also an advocate of fiscal reforms to cut the government's huge debt, including raising the consumption tax from the present 5 percent.

As economics minister last year, Yosano was credited for overseeing a government and ruling coalition plan to slash state spending by up to 14.3 trillion yen ($123 billion) over the next five years to balance the budget.

Yosano said on Monday the government was just as committed to fiscal reforms as the previous prime minister, Junichiro Koizumi.

Our stance is no different from that of the Koizumi administration, he told a news conference, although analysts said the new finance minister may be less aggressive on fiscal policy than his predecessor, Koji Omi.

Spending cuts have hit rural areas hard, striking at the heart of the governing Liberal Democratic Party's rural support base.

A key point is how Nukaga will manage both fiscal reforms and implementation of budgetary measures for supporting the weak as well as those in rural areas, without giving the impression that reforms are taking a back seat, Yamazaki said.

In a news conference after his appointment was announced, Nukaga said: I want to accelerate economic growth while also dealing with fiscal reforms.

Cutting spending is critical to pare Japan's public debt, which amounts to roughly 150 percent of gross domestic product, the highest level among major industrialized nations.

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