FOCUS: Nakagawa's resignation feared to drag down Japanese economy+

TOKYO, Feb. 17 Kyodo -
Finance Minister Shoichi Nakagawa's abrupt resignation over his wobbly
performance at a post-Group of Seven meeting press conference in Rome is feared
to further drag down the Japanese economy, having shaken the ''control tower''
of the nation's economic policies.

Nakagawa, who doubled as financial services minister, will be replaced by
Economic and Fiscal Policy Minister Kaoru Yosano, so Yosano will assume triple
posts, Prime Minister Taro Aso said.
Economists are worried that the exit of the minister who was instrumental in
mapping out Japan's economic policies will deal a serious blow to the already
embattled Japanese economy, which posted the sharpest contraction in 35 years,
or an annualized real 12.7 percent, in the October to December period of 2008.
At a weekend G-7 meeting in the Italian capital, financial leaders pledged to
''frontload'' fiscal policy measures, but the political mess could block swift
budget implementation in Japan.
Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said market
players will refrain from buying assets in Japan because the resignation of
Nakagawa, a close ally of Prime Minister Aso, has hit the already feeble
premier's power base.
''Now that the political outlook has become murkier, I expect yen selling and
declines in Tokyo stocks in the short term. Investors could also sell Japanese
bonds, triggering a triple sell-off,'' he said.
After Nakagawa announced shortly before 1 p.m. that he will step down, the yen
briefly lost ground against the U.S. dollar and Tokyo stocks closed at a near
four-month low.
Shirakawa said even though the yen's depreciation will benefit exporters, the
political uncertainty would fuel public anxiety and discourage consumers from
spending.
The Credit Suisse economist also said it was disastrous that Nakagawa called it
quits while U.S. Secretary of State Hillary Clinton was visiting Japan.
''The U.S. administration must have got an impression that Japan is in serious
political turmoil. They must be thinking they cannot talk to people who may be
replaced soon,'' he said.
A month after the G-7 Rome meeting, financial chiefs of the advanced economies
and emerging countries will meet in London to lay the groundwork for a second
global financial summit slated for April 2 in the British capital.
Shirakawa called for ''resetting'' Japanese economic policies by holding a
general election at an early date.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said Japan
should not create a ''vacuum'' in implementing economic policies and that he
anticipates Nakagawa's successor will lead the compilation of an additional
economic stimulus package.
Following the release of dismal GDP data on Monday, some government officials
and ruling coalition lawmakers called for fresh stimulus measures, on top of
already announced steps worth a total of 75 trillion yen.
Yosano, known as a strong advocate of a sales tax increase, shares the basic
stance with Aso, who has pledged to raise the tax from the current 5 percent in
three years.
''Under Yosano's leadership, Japan would boost spending and try to improve its
fiscal position by raising the sales tax in the future,'' Kumano said.
But he said a political struggle will lie ahead for such a plan to come true,
because many ruling party lawmakers are against increasing the tax for fear of
losing support in the next election.
Kumano also said it will be important for the next financial services minister
to cooperate with the Bank of Japan in facilitating corporate finance. ''The
Japanese financial sector looks okay now, but its base has been steadily
weakening,'' he warned.
Koichi Haji, chief economist at the NLI Research Institute, also said it is
important to carry out economy-boosting steps seamlessly by preparing a fresh
stimulus package soon.
''As the latest GDP data showed, the economy has been deteriorating very fast.
We need new economic measures,'' he said.
==Kyodo