New Japan finance minister Nakagawa in hot seat

Reuters
NEWSMAKER-New Japan finance minister Nakagawa in hot seat
09.24.08, 8:24 AM ET

Japan - By Yuzo Saeki
TOKYO, Sept 24 (Reuters) - Japan's new finance minister, Shoichi Nakagawa, is landing in the hot seat as he seeks to rescue the world's No.2 economy from recession while also taking charge of Japanese financial markets in the midst of a Wall Street meltdown.

The former banker and close ally of newly elected Prime Minister Taro Aso is an outspoken proponent of tax cuts and increased spending in troubled times -- a new approach for the finance ministry which has been more focused on cutting Japan's sky-high public debt.

"Reforms should be carried out with eye on people's livelihoods and economic conditions. If those circumstances change, it is natural that we reassess the content of reforms," Nakagawa, 55, wrote in a magazine article last month arguing the government should take stimulatory steps in tough times.



He argued that debt reduction efforts should not be abandoned but his approach may clash with his colleague, Economy Minister Kaoru Yosano, who is known as a fiscal hawk keen to keep a promise to balance the government's budget within three years.

Japan's economy suffered its biggest quarterly contraction in seven years in the second quarter and, with stormclouds building over the economy of key customer the United States, Japan is heading towards a recession.

Nakagawa is a former farm minister and a vocal nationalist, and, like many Japanese lawmakers, comes from a family of politicians.

He will also serve as financial services minister in Aso's cabinet, in charge of the agency that regulates Japan's financial markets.

"Looking at developments in the United States, coordination between the fiscal and financial authorities is very important," said Kyohei Morita, chief economist at Barclays (nyse: BCS - news - people ) Capital Japan.

"While the financial affairs minister is not a regular participant of meetings of the Group of Seven finance ministers, we need someone who can attend the meeting and, at the same time, consider policy for the financial sector."

But others, looking longer term, pointed out the Financial Services Agency (FSA) was separated from the the powerful finance ministry a decade ago with the aim of separating markets regulation from government fiscal imperatives.

Nakagawa backs using some of Japan's foreign exchange reserves to create a sovereign wealth fund, seeking to emulate the returns obtained by similar funds in Singapore and other nations that actively manage such government cash.

Creation of sovereign wealth fund has been a contentious issue being widely debated in the political and academic circles, and opposed as too risky by the finance ministry, which manages the country's foreign reserves.

Nakagawa, whose former cabinet portfolio includes trade minister, has also headed the ruling Liberal Democratic Party's powerful policy research council.

Outside economics, Nakagawa has been an outspoken critic of China, once warning that Beijing's growing military capabilities could result in Japan becoming just another Chinese province in the future.

Similar comments now could have diplomatic fallout.

"The danger is that someone talks off-topic in a semi-private venue," said Phil Deans, a professor at Temple University in Tokyo, referring to the appointment of Nakagawa and other staunch conservatives. "This may not impact on the fundamentals of the relationship (with China), but it means the danger is there."

Nakagawa is a son of a late former farm minister Ichiro Nakagawa and a graduate of the prestigious University of Tokyo.

He worked for Industrial Bank of Japan, a precursor of Mizuho Financial Group (nyse: MFG - news - people ) for five years before entering parliament in 1983, taking over the seat of his father who had committed suicide. (Editing by Rodney Joyce)

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