Financial Pacific - Japan's new PM Noda delivers little excitement (third party)
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Financial Pacific - Japan's new PM Noda delivers little excitement (third party)

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  • 1. Wealth Management Research 6 September 2011Japan economics Kazuhiko Ogata, economist, UBS AGJapans new PM Noda deliverslittle excitement • New Prime Minister Yoshihiko Noda is unlikely to surprise the markets, at least in the near term. • His new cabinet will put its primary focus on: 1) speedy reconstruction of quake-hit areas; 2) fiscal reforms; and 3) higher economic growth. • However, the ongoing political deadlock remains a daunting hurdle, and it still is a big question if he can really find a breakthrough.Yoshihiko Noda, the former Finance Minister, won the rulingDemocratic Party of Japan (DPJ) Presidential election on 29 August,and on the following day he was appointed as Japans new PrimeMinister (PM), replacing Naoto Kan. Noda stressed in his latestpress conference that his new cabinet would concentrate on: 1)speedy reconstruction of quake-hit areas; 2) fiscal reforms; and 3)higher economic growth. Nonetheless, the financial markets haveappeared to show little excitement as the replacement of the PMhas been nearly an annual event for Japan in recent years (indeed,Noda is the sixth PM in the past five years). Moreover, the marketconsensus is that Noda is unlikely to adopt remarkably different orinconsistent policies with those of the previous administration giventhat he had already been a core player in the Kan cabinet. Thus,the equity market impact is neutral for now, and the same is truefor the JPY market.Keen on consumption tax hikesNoda may somewhat step up his efforts on currency rate controlsgoing forward. The fact remains, however, that the emergencypackage of countermeasures to the JPYs persistent strength, whichNoda announced as Finance Minister on 24 August, has proven tobe disappointing. This included a proposal to create a lending facilityin an aim to encourage global M&A activities and energy security,thereby ultimately helping enhance foreign currency appetite. Inthis scheme, the governments Foreign Exchange Special Accountwill lend a maximum of USD100 billion, at 6-month LIBOR, tothe corporate sector, through the Japan Bank for InternationalCooperation, a state-run bank. Moreover, the Ministry of Finance(MoF) has decided to intensify its monitoring of major banks FXtrading positions.This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 3.
  • 2. Japan economicsWe acknowledge that these measures represent the governmentsintense alert against JPY strength, but the short-term impact is likelylimited. Nonetheless, Noda is keen on consumption tax (VAT tax)hikes, which may help stabilize the Japanese government bond mar-ket. Indeed, at the start of his new cabinet on 2 September, he de-clared he would submit consumption-tax-related legal proposals tothe parliament by March.Political deadlock a daunting hurdleIn this context, the primary focus of attention for the financial mar-kets, among other things, is how Noda can overcome the ongo-ing political deadlock. It still is a big question if he can really finda breakthrough. Otherwise, it will be difficult for him to accom-plish his main initiatives given the challenging parliamentary struc-ture. Even after the renewal of the PM, the upper house remainscontrolled by opposition parties (e.g., the Liberal Democratic Party),while the ruling DPJ dominates the lower house. Noda, 54, is thethird-youngest PM in Japans post-war history, and his vitality couldbe an advantage. Nonetheless, it remains to be seen if this “merit”will really be a positive when Noda looks for the opposition partiescooperation and agreement in parliament. Noda really needs to de-liver a convincing answer on this daunting hurdle, so that he canexcite the public as well as the financial markets. Wealth Management Research 6 September 2011 2
  • 3. Japan economicsAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisionsof UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information onlyand is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis containedherein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and productsare subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors.All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but norepresentation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and itsaffiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject tochange without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions ofUBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employeesthereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to theissuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market inthe securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify.UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units,divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for itsfuture performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back lessthan you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income ofan investment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of ourindividual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investingin any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or asubsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not beliable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distributiononly under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and anaffiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-USaffiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should beeffected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report havenot been and will not be approved by any securities or investment authority in the United States or elsewhere.Version as per June 2011.© 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved Wealth Management Research 6 September 2011 3