Japan's 'team Abe' faces leadership test on reform

Japan's 'team Abe' faces leadership test on reform
Tue Oct 3, 2006 10:05 PM ET
By Yoko Nishikawa

TOKYO, Oct 4 (Reuters) - Japan's Prime Minister Shinzo Abe has made two things clear during his first week in office -- growth is the key to fiscal reform, and his office will be the centre of decision-making.

Abe's success hinges on how much he can strengthen the capacity of the prime minister's office in conducting economic reforms and ensuring that growth-oriented policies do not lead to pork-barrel spending, economists say.

The new administration has been dubbed "Team Abe" for both his penchant for rewarding allies with posts and a consensual decision-making style that contrasts with the top-down leadership of his combative predecessor, Junichiro Koizumi.

A push to centralise decision-making at the prime minister's office with a new team of special advisers is one feature of his administration.

"Since Abe doesn't have the charisma that Koizumi had, he needed to create a new framework to prevent various ministries from asking for more spending whenever Abe calls for growth," said Takahide Kiuchi, a senior economist at Nomura Securities.

"The key to promote both growth and reform is how well the prime minister's office can take leadership," he added.

For instance, economists warn that various ministries could line up spending requests to support "Second Chance" measures -- Abe's policy plank -- aimed at ensuring that economic reforms do not result in a society divided into winners and losers.

Among Abe's inner circle as an adviser on economic and fiscal policy is young lawmaker Takumi Nemoto. But how much influence he can gain over decision-making and how he will coordinate with the government's top economic council are still unclear.

"The issue is whether the prime minister's office has the know-how, wisdom and capacity to conduct policies as bureaucrats do," said Masaaki Kanno, chief economist at J.P. Morgan.

"They created a new scheme but its success depends on the people who run it. That's still an unknown quantity," he added.

PRO-GROWTH CABINET

Economists also said the lack of shining stars in the line-up of economic ministers could be a reflection of Abe's willingness to make his office more powerful over ministries.

Choosing Koji Omi as finance minister, seen as sympathetic to business interests, and picking a tax expert, Hakuo Yanagisawa, as welfare minister also underscored Abe's focus on growth and reluctance to raise taxes to fix public finances -- a politically sensitive topic ahead of an upper house election next year.

Another key figure is Economics Minister Hiroko Ota, a reformist professor who will act as the top spokeswoman for the Council on Economic and Fiscal Policy (CEFP), the government's top economic council headed by Abe.

Ota has close links with Heizo Takenaka, who was Koizumi's right-hand man on economic reform, but initial impressions of the soft-spoken Ota raised speculation that the ruling Liberal Democratic Party heavyweights such as Secretary-General Hidenao Nakagawa could water down her influence.

"They need to divide their roles," said Kenji Yumoto, chief economist at Japan Research Institute. "The CEFP needs to come up with broad quidelines, while the team at the prime minister's office should decide what Abe wants to do with those guidelines."

So far, Ota seems to have the full backing of Nakagawa, seen as a behind-the-scenes power broker and Abe's close ally.

"Minister Ota will be an architect of Abe's economic policy, or 'Abenomics'," Nakagawa said. "In the past, our party was against the CEFP, but now we fully support it."

Abe's economic policy will be enhanced by the CEFP's new private-sector members, including Fujio Mitarai, head of Japan's biggest business lobby and an advocate of pro-growth strategies, and reformist Uichiro Niwa, chairman of trading firm Itochu Corp. <8001.T>.

Another member is Takatoshi Ito, an economics professor and former deputy vice finance minister for international affairs. Ito is expected to help shape Abe's economic diplomacy but he is also known as an advocate of inflation targeting.

Abe's focus on boosting growth, coupled with Ito's appointment, have fuelled views that the government could be tough on the Bank of Japan, although key ministers such as Omi said the government should not fret over monetary policy decisions.

"The CEFP would not talk about every policy decision by the BOJ. But it may need to talk about the role of monetary policy when the government pursues fiscal consolidation," said Japan Research's Yumoto.