FXstreet.com (Barcelona) - Nomura Economists Shuichi Obata and Tomo Kinoshita have taken a look at today's announcment of Abe's new cabinet and noted that the line up is aimed at centralising policy making functions.

They write, "The second Abe cabinet was launched on 26 December 2012. Economic related cabinet members include former prime minister Taro Aso as finance and financial services minister (concurrently deputy prime minister), former Liberal Democratic Party policy research council chair Toshimitsu Motegi as economy, trade & industry minister, and former trade minister Akira Amari as economic revitalization and economic & fiscal policy minister, a key position in terms of the cabinet's economic policy.

The cabinet also includes previous LDP president Sadakazu Tanigaki and rival candidates to Abe in the recent LDP presidential election, Nobuteru Ishihara and Yoshimasa Hayashi, while senior LDP party appointments include party members with fairly close relationships to Abe, such as Seiko Noda as general council chair and Sanae Takaichi as policy research council chair"

They think that the line up indicates that Abe is aiming to centralise policy decision making at the Prime Ministers office. In the lower house election, the LDP together with its New Komeito coalition partner gained more than two thirds of the seats, meaning that with the exception of appointments needing Diet approval, the new administration should largely avoid the impact of the split Diet and should have a high degree of freedom in its policy-making. As a result, they are anticipating a strong administration.

In the first cabinet meeting, Obata and Kinoshita comment that Abe is reported to have set forth economic revitalisation as his foremost basic policy, putting it ahead of fiscal retrenchment, saying that fiscal rebuilding and the very future of Japan depend on a strong revitalised economy.

Abe said that he will establish a revitalisation office within the cabinet to spearhead efforts and will resurrect the Council on Economic and Fiscal Policy, with the former handling micro policies such as industrial strategy and the latter handling macro policy such as longer-term direction and basic policies for drafting budgets.

They notes that Finance Minister Aso has indicated he will not necessarily adhere to the ¥44trn limit on JGB issuance set down by the Democratic Party of Japan administration as the new administration reworks the fiscal retrenchment targets. However, he has also indicated that the initial budget proposal for next fiscal year will be based on fiscal retrenchment targets.

PM Abe has already proposed radical monetary easing, including the introduction of a 2% inflation target, as well as an economic stimulus in a JPY 10 trn supplementary FY 12 budget. Obata and Kinoshita note that in response to strong pressure from the new administration, the Bank of Japan has indicated its intention to consider setting an inflation target at its January policy meeting. The financial markets have been pricing in aggressive fiscal and monetary policy, with the result that Japanese share prices have risen and the yen has weakened. At the same time, concerns of delays to fiscal retrenchment have started to simmer.

They finish by stating that the biggest and most immediate issue for the new administration is to project its own colour and maintain the trust of the voters and the markets until the upper house election scheduled for next summer. They write, "No further national elections are expected until summer 2017, so if the LDP-Komeito coalition can gain a majority in the upper house this time around, the administration should have leeway for bold policy measures. We think the coming six months or so will be a key period for the new administration."


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