Bright spots in Hosokawa's resignation: Economists

Bright spots in Hosokawa's resignation: Economists

TOKYO (Reuter): Prime Minister Morihiro Hosokawa's decision to resign has cast shadows over Japan's economy just when it looked poised for a fragile recovery, but some economists saw a silver lining in the clouds.

Japan has been stuck in a slew of economic wrangles, including a stalled debate on the budget for the business year that started on April 1 and deadlocked trade talks with the United States.

The immediate effect of Hosokawa's decision to resign yesterday is to cloud the outlook for policy decisions, something economists said could hamper the incipient recovery.

"This leaves certain question marks, such as the shape of the cabinet, how soon an election will be called, whether the Liberal Democratic Party will continue its tactics and how business sentiment will be affected," said Robert Feldman, chief economist at Salomon Brothers Asia.

"On the economic side the budget looks unlikely to pass soon, the United States won't know to whom it's talking, there is the tax issue and implementation of Japan's latest package of market- opening measures could be delayed," he said.

Hosokawa, who swept to power last August pledging to clean up politics and cut through the red tape that hampers economic growth, said he was resigning to take responsibility for a row over controversial personal loans that paralyzed parliament.

Cabinet

Business groups immediately called for political stability and the quick formation of a new cabinet. Pessimists worried political turmoil could hinder a long-awaited economic recovery. "I think it's bad for the economy," said Paul Summerville, director of Asian research at Lehman Brothers Japan. "It adds an element of uncertainty at a pretty delicate period."

Signs have emerged the economy is bottoming out, boosting hopes of a consumer-led recovery later this year. But that recovery is vulnerable to the strong yen, while corporate capital spending, another vital growth engine, is still weak.

"There are signs the economy is improving slightly and this is an extremely important time for the economy," said Masaru Takagi, chief economist at Fuji Research Institute.

"If the cabinet resigns en masse, the political vacuum will continue. In that case, nothing can be done about this year's budget, so there is a worry about the impact on the economy." Domestic political confusion could also bolster the yen if U.S.- Japan trade relations worsen as a result -- a negative for exporters' profits, some economists said.

But some economists saw potential benefits from Hosokawa's political demise.

Despite being plagued by feuding, Hosokawa managed to pass a long-promised political reform package, open Japan's closed rice market a crack to help world trade talks and cobble together a big economic stimulus package in February.

But he then stumbled badly when angry coalition partners forced him to withdraw a tax reform plan, including a new value- added tax.

Also, despite Washington's early hopes, Hosokawa was unable to improve tense U.S.-Japan trade ties, which frayed further when he failed to iron out key economic disputes at his February 11 summit with U.S. President Bill Clinton.

Kantor

Foreign Minister Tsutomu Hata still plans to meet U.S. Trade Representative Mickey Kantor on the sidelines of world trade talks in Morocco next week. But Trade Minister Hiroshi Kumagai said political developments here made the future course of U.S.- Japan economic framework talks uncertain.

Optimists said Hosokawa's fall might in fact cure the budget paralysis that has gripped the government. And while no one held out hopes of soon unsnarling trade ties with the United States, some predicted Tokyo's turmoil could persuade Washington to tread softly.

Tax reform, meanwhile, could go ahead since the Socialists, the coalition's largest member, have already given the nod to an eventual hike in the nation's three-percent sales tax.

"Broadly speaking, I think the effect is positive," said Geoffrey Barker, economist at Baring Securities (Japan).

Short-term, bureaucrats are likely to tighten their grip on policy, a fact which once would have inspired confidence, but now raises fears of delays in the deregulation desired by both domestic business and foreign trade partners.

Even so, the deregulation trend is unlikely to be reversed, Barker said. "I regard deregulation as a groundswell and unstoppable. It will come anyway."