Japan would lose voice of prudence if scandal brings down Aso

Tokyo

IF the cronyism scandal that has paralysed Parliament in Japan ends up swallowing veteran Finance Minister Taro Aso, a government hooked on radical reflationary polices would lose its strongest defender of fiscal prudence.

Investors should watch out. The scandal has still to play out, and markets haven't priced in just how much damage it could inflict on Prime Minister Shinzo Abe's government.

"Aso has been a restraining voice against growing calls in the administration for big fiscal spending and radical steps," said Koichi Haji, chief economist at NLI Research Institute. "If Aso were to resign, the next finance minister would have big shoes to fill."

Mr Abe and Mr Aso are under fire over the finance ministry's admission that it had altered records of a discounted sale of state-owned land to a school operator with ties to Mr Abe's wife.

Opposition lawmakers have called for Mr Aso's head, and are boycotting parliamentary debate over budget proposals for the coming financial year.

With his enemies circling, Mr Aso has refused to step down, and Mr Abe has defended an ally whom he was counting on to help him secure a third term as leader of the ruling Liberal Democratic Party (LDP) when the party votes in September.

But there are growing calls even from within the LDP for Mr Aso to fall on his sword. A public opinion poll by Sankei newspaper showed that 71 per cent of respondents thought that he should go.

"This is a serious threat to democracy," Yoshimitsu Kobayashi, chairman of Japan's influential business lobby Keizai Doyukai, told a news conference on Tuesday. "If you're a head of a private company, you would resign regardless of whether you had knowledge of the misconduct or not."

It is an awkward time for export-driven Japan to have a finance minister's future hanging in the balance, with the world fearful that US President Donald Trump may have fired the first shots in a global trade war by placing hefty tariffs on steel and aluminium imports.

Mr Aso already appears set to skip a Group of 20 finance leaders' gathering next week. Though no date has been set for the next meeting of a US-Japan bilateral economic dialogue, Mr Aso is supposed to head the delegation in Washington that will come under pressure to reduce Japan's trade surplus with the United States.

Even if Mr Aso survives this scandal, some analysts fear that he would be so politically damaged that he could lose his clout.

Aged 77 - old even by Japan's standards - Mr Aso's political shelf life could be running out.

But as a former premier himself and the leader of a powerful faction within the LDP, Mr Aso still has enough political heft to tell a prime minister who is 14 years his junior to think twice before making fiscally risky moves.

"The premier doesn't take Aso's views lightly," said a government official placed well enough to know. "The fiscal debate could be affected depending on how the scandal unfolds."

Japan's public debt, at twice the size of its economy, is the largest among major industrialised nations as a rapidly ageing population boosts welfare spending.

In January, Japan pushed back by two years the timing for achieving its fiscal discipline target in a sign of the difficulty of restoring fiscal health.

Based on the new timeframe, the government will in June draft new fiscal guidelines that will influence state budgets for coming years.

Addressing a Columbia University seminar in New York a year ago, Mr Aso spelled out what any loss of fiscal prudence could mean for Japan.

"If we abandon our efforts on fiscal discipline, that could invite a bust in Japan's finances or runaway inflation that would have a detrimental effect on the general public," he said.

It is not just on fiscal policy that Mr Aso's conventional approach acts as a brake on more radical thinkers. If he leaves the finance ministry, the Bank of Japan would lose a backer in seeking a slow but steady exit from its huge monetary stimulus. He has said that there are limits to how much monetary policy can do, and that ramping up stimulus further will have little benefit for the economy.

He is opposed to radical steps such as "helicopter money", under which the central bank directly underwrites government debt, so his departure could embolden advocates of such steps.

"Without Mr Aso, Mr Abe's administration will lose restraint on fiscal and monetary policy," said Yasunari Ueno, chief market economist at Mizuho Securities, noting that any faltering in the economy could expose those risks. REUTERS