Japan Finance Minister Nakagawa May Back Economic-Policy Shift

Sept. 24 (Bloomberg) -- Shoichi Nakagawa, Japan's third finance minister in two months, will likely back an increase in spending and cut taxes to ``jump start'' the economy, signaling the first policy shift in two years.

Nakagawa, 55, a former policy chief of the ruling Liberal Democratic Party, will replace Bunmei Ibuki, 70, after parliament approves Taro Aso as prime minister later today, said a ruling-party lawmaker briefed on the appointment.

Japan will be the ``laughing stock of the world'' if it prioritizes debt reduction when the economy is on the verge of a recession, Nakagawa wrote in the Yukan Fuji newspaper on Sept. 5. His appointment signals Japan's first shift in economic policy since 2006, when then Prime Minister Junichiro Koizumi set a goal of balancing the budget by 2011.

``Japan is now shifting to focus on boosting the waning economy,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. ``Japan's structural reform, including balancing the budget, is set aside.''

The yield on the benchmark 10-year bond rose 1.5 basis point to 1.495 percent at 12:43 p.m. in Tokyo. The yield on the five-year note rose to 1.085 percent.

``We expect a shift to expansionary fiscal policy centered on tax cuts, with structural reform on the back burner until the economy returns to cruising speed,'' said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc., wrote in a report. ``The market's judgment on Aso-nomics will depend largely on the details of fiscal expansion and its funding.''

Former Banker

A graduate of Tokyo University and a former banker at the Industrial Bank of Japan Ltd., a predecessor of Mizuho Financial Group Inc., Nakagawa represents a constituency in Hokkaido, Japan's northernmost island. He served as trade minister and agriculture minister under Koizumi.

``We're not in a situation where we can stick to the goal of restoring a primary surplus by fiscal 2011,'' Nakagawa wrote in the Yukan Fuji newspaper this month. ``If the surplus is attained at the expense of the Japanese economy sinking, we'll be the laughing stock of the world.''

``We need fiscal stimulus, including the reintroduction of income-tax breaks, lower corporate taxes and other economic measures that will jump start the Japanese economy,'' he wrote.

Nakagawa recommends cutting company tax to about 30 percent from 40.7 percent, the highest among Organization for Economic Cooperation and Development nations.

``Even if tax revenue falls in the near term, a tax cut may help revitalize business activity and eventually lead to a rebound in tax receipts,'' Nakagawa said in an interview in August.

``The issue of lowering corporate taxes to increase companies' competitiveness as the population shrinks is unavoidable,'' said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. ``This appointment may make that implementation easier.''

Party Survives

Nakagawa may have to wait to see if his party survives a general election that may be held as soon as next month before implementing any policy. Ichiro Ozawa leader of the Democratic Party of Japan, is hoping to kick Aso out of power by capitalizing on the party's dwindling ratings among voters.

Nakagawa is married with two children. His hobbies include reading, tennis and gardening, according to a profile on his Web site.