Analysis - Noda faces tough hurdles as sixth Japan PM in 5 yrs

TOKYO Mon Aug 29, 2011 11:45am IST

Japan's Finance Minister Yoshihiko Noda stands up as he is chosen as the party's new leader while the party lawmakers clap their hands during Japan's ruling Democratic Party of Japan leadership vote in Tokyo August 29, 2011. REUTERS/Toru Hanai

Japan's Finance Minister Yoshihiko Noda stands up as he is chosen as the party's new leader while the party lawmakers clap their hands during Japan's ruling Democratic Party of Japan leadership vote in Tokyo August 29, 2011.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - Finance Minister Yoshihiko Noda, elected by Japan's ruling party on Monday to become the nation's sixth prime minister in five years, faces a long list of challenges from rebuilding from a devastating tsunami and the nuclear crisis it triggered to reining in huge public debt.

Following are some implications of Noda's election:

SHORT-LIVED LEADER?

Japan's last five leaders have struggled to implement policies in parliament where the opposition can block bills, and the biggest risk is that Noda could also end up a short-termer. The ruling Democratic Party of Japan has a regular leadership election set for September 2012.

"Unfortunately chances are ... that we'll see the same debates in 12 months," said Jesper Koll, director of equities research at JPMorgan in Tokyo.

Noda has called for a grand coalition with main opposition parties to break the parliamentary deadlock but such proposals got cool reception from the opposition.

BALLOONING DEBT

Moody's Investors Service cut its rating on Japan's government debt by one notch to Aa3 on Aug. 24, blaming in part the revolving-door leadership that has hampered effective economic strategies to deal with public debt now twice the size of the $5 trillion economy.

Noda has a reputation of a fiscal hawk, and indeed critics say he is too much under the thumb of finance ministry bureaucrats. He has supported a plan to double the 5 percent sales tax by mid-decade to fund bulging social security costs of an ageing society.

But while he was initially clear in calling for temporary tax hikes to fund rebuilding from the March tsunami -- Japan's biggest reconstruction project since right after World War Two -- in the run-up to the party vote he struck a more cautious note, saying it was vital to achieve both growth and fiscal reform.

Still, bond markets will probably welcome the choice of the only candidate who has been consistently calling for Japan to face painful reforms to contain its debt.

YEN AND MONETARY POLICY

Japan intervened in the currency market and eased monetary policy by boosting the central bank's asset buying programme on Aug. 4, but the measures have had only a limited effect in stemming yen rises.

The government's policy on monetary policy and yen rises will remain largely unchanged. Noda, as finance minister, has vowed to act, including intervening in the market, to stem excessive rises in the yen and will likely stick to that stance.

While he has called for the Bank of Japan's cooperation in dealing with the strong yen, he has refrained from pressuring the central bank for additional easing steps and has respected its independence -- unlike other candidates.

ENERGY POLICY

Noda has distanced himself from outgoing Prime Minister Naoto Kan's vision of a nuclear power-free society, saying trust in nuclear power needs to be restored. He wants to ensure a stable power supply by restarting halted reactors after confirming they are safe, but whether local authorities and residents will agree is unclear.

RULING PARTY RIFTS

Noda takes over at the helm of a fractious ruling party. He won with support from critics of Ichiro Ozawa, who still wields power despite facing trial in a funding scandal. Ozawa and his backers are unlikely to bolt from the party any time soon, but they remain a considerable force and could still undercut the new leader's efforts.

DIPLOMACY

Efforts to tighten ties with security ally the United States, strained after the Democrats first swept to power in 2009, have been on hold due to Japan's political paralysis and confusion. Relations with Beijing chilled last year when a territorial row flared up and policymakers have had little scope to forge a strategy to deal with Japan's giant neighbour.

Noda has stressed the importance of the U.S.-Japan security alliance as the core of Japan's diplomacy.

Noda recently reiterated his view that Japanese wartime leaders convicted of war crimes by an Allied tribunal after Japan's defeat in World War Two were not "war criminals" under domestic law, something that may create frictions with Beijing and Seoul. He has also said China's rapid military buildup and expanding naval activities pose a serious regional risk.

(Editing by Tomasz Janowski)

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