Japan's New Leader Noda Faces Big Expectations Amidst Tough Times

Japan's newest Prime Minister, Yoshihiko Noda, will reveal the members of his new cabinet in Tokyo on Friday after being sworn in as the country's third leader in a short span of less than a year.

Mr Noda, who was the Finance Minister in the government headed by Prime Minister Kan, who stepped down last week, will hold a news conference later today which will be vital in setting his agenda.

But the media conference and other statements in the next couple of days will also be vital in convincing his own party, the opposition Liberal Democrats, Japanese voters, businesses and trading partners that he will somehow make a difference to a country still coming to terms with the impact of the March 11 quake, tsunami and the Fukushima nuclear crisis.

He starts with an advantage most other Japanese leaders have lacked since 2006, an appreciation of the country's terrible deficit and debt burdens from his time as Finance Minister.

And, based on statements so far from him this week and in the previous government, he strongly supports the idea of Japan's GST being increased to 10% (from the current 5%) over the next five or so years.

That will help not only stabilise the country's finances, but also pay for much of the added costs (over $US300 billion) to refinance the reconstruction of the areas of the northeastern coast devastated on March 11, as well as the huge costs in supporting the ailing Tokyo Electric Power company (which owns Fukushima Daiichi) in paying compensation and the decommissioning of the damaged complex

On a possible tax increase to finance reconstruction projects, Noda said this week he wants to wait for the government tax panel to present multiple options to the new party leadership.

He ruled out the possibility of calling a snap general election and wants to talk to the opposition and other groups about drafting a third special budget to accelerate the pace of reconstruction.

His attitude to the record level of the yen, which continues to impact exporters, will be a key policy position from the new PM.

Figures out this week showed the Bank of Japan spent a record $US60 billion in August intervening to try and weaken the yen, to no avail.

All this is a reminder that the biggest task confronting the new PM and his government is the economy: specifically from the rebuilding of the damaged areas of the north east, to tackling the yen, controlling spending and coming up with a coherent plan to steady the massive government debt which is twice the country's annual GDP.

All this matters to Australia. Japan is our second biggest trading partner after China, and yet we have a bigger trade surplus with Japan than with China.

In the year to June, official trade figures showed we had a $A30.07 billion trade surplus with Japan, compared with the $A23.78 billion with China.

Trade with China is bigger: we shipping $A46.7 billion worth of goods to Japan in 2010-11, against $A64.6 billion to China.

We imported $A16.6 billion worth of products from Japan, against $A41.11 billion from China.

So Japan is almost as vital to our well being as China is.

The current power shortage and closure of many of the country's 54 nuclear power stations has boosted our exports of LNG and this will continue for at least the next year, possibly two.

As of yesterday 78% of the 54 reactors were shut down for maintenance, inspection or decommissioning. That's a total of 42 facilities.

Coking coal and iron ore exports will be boosted to Japanese steel mills as the reconstruction efforts get underway.

Japanese steel production is running at around 9 million tonnes a month at the moment, its forecast to rise slowly to 10 million in some months as demand from the rebuilding kicks in.

The Japanese economy is still recovering from the impact of the disasters, although the production data for July showed a rise of 0.6% for the month, not the 2% expected by the market.

Japanese household spending though remains weak, down 2.1% in July from the same month in 2010 and the 5th monthly fall in a row.

Car purchases fell in July, electricity consumption eased (but that was due to the appeals from the government for consumers to cut power use in the current summer to prevent black outs).

But incomes rose 1.6% in July, the first rise in five months.

Unemployment in July rose slightly to 4.7% and in a surprise the core consumer price index (which excludes energy and fresh food) rose 0.1% in July and was unchanged from June (instead of falling as it was doing for much of the past two years).

Last Monday Japanese government raised its economic assessments for nine of Japan's 11 regions from its previous evaluations in May as manufacturing operations and consumer spending has improved since the March 11 earthquake and tsunami.

Japan's trade surplus reached 72.5 billion yen ($US948 million) in July, a drop of 90.8% compared to a year ago, but the second monthly surplus in a row, confirming that the country is back on track after the March 11 disasters.

Exports fell 3.3% to 5.78 trillion yen in July while imports rose 9.9% to 5.71 trillion.

The recovery was confirmed by a sharp narrowing of the negative growth rate in the June quarter.

Economic growth in the three months to June (the first of the country's 2012 financial year), fell 0.3% from the first quarter, which was down 0.9% from the December quarter (which in turn was down 0.8% from the September quarter of last year.

On an annual basis though, real gross domestic product fell 1.3% in the June quarter, a huge improvement on the 3.6% fall in the three months to March and half market forecasts for a 2.7% contraction.

Now economists in Tokyo are forecasting that the economy will be back in the black this quarter, and expect a surge in the next two quarters after that.

On a nominal basis, GDP fell an annualized 5.7% in the April-June period, which corresponds to a 1.4% fall from the previous quarter

Analysts say the contraction was mostly due to the slump in output and exports in April from the quake and tsunami.

Consumer spending in retail outlets, on beer, food stores and restaurants, cars and other major items also fell in April and May, although sales momentum is now slowly recovering.

Data released by Japan's Cabinet Office in its preliminary GDP report, said exports fell 4.9% and personal spending eased 0.1%.

But as encouraging as this data is, the mythical gorilla in the Japanese economy is that huge debt.

And Moody's ratings agency gave the country and the political class a reminder of its importance last week when it downgraded Japan's sovereign debt rating by one notch, and noted the continuing political uncertainty in its list of reasons for the move.

Moody's downgrade of Japan was its first since 2002, when it reduced the rating to A2. It had upgraded Japan three times since then, with the last upgrade as recent as May 2009.

Moody's said on Wednesday it was cutting Japan's government bond rating to Aa3 from Aa2, citing the "large budget deficits and the build-up in Japanese government debt since the 2009 global recession."

"Over the past five years, frequent changes in (Japan's) administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," Moody's said.

It is the first time since the March 11 earthquake and tsunami that a major ratings agency downgraded Japan's sovereign debt. Moody's said the outlook was stable.

The action puts Moody's on a par with other major ratings companies Standard & Poor's and Fitch Ratings, both of which rate Japan's sovereign debt at AA- with a negative outlook.

As Japan's fiscal position worsened this year, it lowered the outlook to negative on February 22. It announced a review for possible downgrade on May 31, voicing doubt the country's leaders would be able to contain the industrialised world's biggest debt.

The outlook is now stable, which means no downgrade for quite a while from Moody's, but Fitch and S&P have negative outlooks and one or both might be tempted to cut the rating if Prime Minister Noda stumbles in his attempt to boost taxes and put together a plan to stabilise government finances.