At the ripe old age of 71, Yasuo Fukuda is becoming the next Prime Minister of Japan taking over the leadership of the ruling Liberal Democratic Party from the much younger but far more beleaguered Shinzo Abe. Mr. Abe resigned his post suddenly amidst deep voter dissatisfaction after suffering from physical exhaustion.
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What Does Fukuda Election Mean for the Yen?[/B]
At the ripe old age of 71, Yasuo Fukuda is becoming the next Prime Minister of Japan taking over the leadership of the ruling Liberal Democratic Party from the much younger but far more beleaguered Shinzo Abe. Mr. Abe resigned his post suddenly amidst deep voter dissatisfaction after suffering from physical exhaustion.
Mr. Fukuda?s father was the Prime Minister of Japan in the 1970?s and the Fukudas are the first father and son team to occupy the post in modern Japanese history. Mr. Fukuda himself was ambivalent about taking on the position. “I didn’t think Japan should have father-and-son prime ministers and I didn’t want any part in making that happen,” he said. But the crisis within LDP made him change his mind.
The LDP has ruled Japan for all but 10 months during its post war period and is, on the one hand, credited with bringing enormous stability to the country but on the other criticized for its unresponsive, institutional cronyism which many analysts believe has exacerbated Japan?s economic problems by favoring party interests ahead of voter needs.
[B]Economic Malaise[/B]
There is little doubt that Japanese economy finds itself in economic malaise as the country?s GDP shrank at almost twice the anticipated rate in Q2 printing at -1.2% versus initial projections of a 0.5% gain. Business spending plummeted and consumer sentiment as expressed by the Eco-Watchers survey reached its lowest level in four years registering a reading of 44.1 - sharply below the 50 boom/bust line. Japan?s lackluster economic data has been one of the primary reasons for yen persistent long term weakness as analysts see little chance of any further tightening by the BOJ given the current economic performance.
The question now facing yen traders is whether Mr. Fukuda?s election is likely to change that scenario anytime soon. Mr. Fukuda, known as moderate on foreign policy issues comes to the job with limited political experience. He served as the chief cabinet secretary for four years under two former prime ministers, Junichiro Koizumi and his predecessor, Yoshiro Mori. But he has never been the head of a ministry and therefore lacks any direct governmental expertise. Indeed, Mr. Fukuda himself noted that, “I’m not highly educated or talented, and I don’t have much experience. But despite that, you have chosen me as party president. I am moved.”
[B]Low Expectations an Advantage[/B]
Yet it is precisely these qualities that may serve as an advantage to Mr. Fukuda. Having come to the post of Prime Minister with very low expectations, Mr. Fukuda may be able to operate more freely, allowing him to institute greater political reforms than most political watchers expect. Unlike many of his predecessors Mr. Fukuda is not a life long politician, spending a considerable part of his career as an oil company employee. He is in fact known for his business like manner and pragmatic approach to problem solving.
His greatest strength may be in his conciliatory stance towards Japan?s neighbors in Asia Pacific. He has vowed to stay away from the Japanese shrine honoring the war dead that has been a very strong source of friction between Japan and China and South Korea who view it as an affront to the memory of events of WWII. Mr. Fukuda?s position was welcomed by Chinese. Zhou Yongsheng, a professor at the Institute of China Foreign Affairs University noted that, "Mr. Fukuda respects other Asian countries. So I believe the Sino-Japan relations will go positively, and the room for cooperation between the two countries will be enlarged."
Such attitude may be quite helpful in supporting Japanese growth going forward. China has become Japan?s primary trading partner and its double digit annual growth is likely to exert a powerful positive force on Japanese businesses as they provide machine tools for China continuing industrialization and sell consumer products to China burgeoning middle class. Given the fact that exports remain the key driver of growth in Japanese economy, any facilitation of trade with China should be beneficial to Japanese economic performance going forward.
[B]No Longer Negative But Not Quite Positive[/B]
While Mr. Fukuda?s leadership should introduce a welcome note of stability into the recent chaotic state of Japanese politics, he is unlikely to make any dramatic moves. The country continues to suffer from serious lack of consumer demand and its is doubtful; that fiscally conservative Mr… Fukuda would offer a radical solution such as a tax cut to stimulate consumption. Therefore, yen bulls hoping for any rapid economic impact from Mr. Fukuda?s ascension are likely to be disappointed. Nevertheless, the aura of calm and competence that he brings to the PM post should not be underestimated. If Mr. Fukuda can restore a sense of confidence amongst the Japanese consumers, market dynamics may do the rest.
While, the election of Mr. Fukuda cannot be viewed as a unqualified positive for the yen, at the very least it eliminates the sense of confusion and disappointment that surrounded Mr. Abe?s tenure. Over the past year yen?s strength has come only as result of risk aversion in the currency markets as Japanese economy wavered between growth and contraction. If Mr… Fukuda could bring a steady hand to Japanese politics that would translate into stronger consumer confidence and demand, the BOJ would be able to begin normalizing Japan?s ultra low interest rates which should prove positive for the yen in the long run.