Q+A-How will the new Japan govt affect banking, markets?

Wed Sep 16, 2009 12:03am EDT

By David Dolan

TOKYO, Sept 16 (Reuters) - Japan's incoming government has named a veteran politician with a reputation for opposing market-friendly policies to head up banking policy and financial supervision, in a surprise move that will likely concern some investors.

Shizuka Kamei, a 72-year-old former police official and the head of a tiny party formed to fight the privatisation of Japan's postal system, has been picked as financial services minister. [ID:nT213641]

He said his focus will be on ending the planned sale of Japan Post, suggesting financial market reforms may take a back seat.

"In the long-run, each market will need to price in (Japan's) slowing reforms and falling growth expectations, and that will deepen worries about deteriorating fiscal conditions at the same time," Kazuhiko Sano, chief strategist for Nikko Citigroup, said in a note to clients.

The following are some questions and answers on what the Democratic Party of Japan, and Kamei, could mean for the supervision of Japan's financial services industry.

WHY IS KAMEI'S APPOINTMENT A SURPRISE?

Kamei, a previous transport and construction minister, has little financial experience and has been a harsh critic of the market-oriented reforms introduced by former prime minister Junichiro Koizumi.

He takes over as financial services minister at a crucial time for financial markets in the world's second-largest economy.

Although home to world-class manufacturers such as Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) and Nintendo Co Ltd (7974.OS: Quote, Profile, Research, Stock Buzz), Japan has been overshadowed in finance by the rise of Hong Kong and Singapore, which boast lower taxes and lighter regulation.

Foreign exchange trading volume in Japan fell 16 percent in April from a year earlier as hedge funds cut back, sinking Tokyo to No.2 spot in Asia behind Singapore. [ID:nT169919]

While Kamei's predecessors emphasised the need to follow the lead of Hong Kong and Singapore, his initial comments have focused on plans to dismantle Koizumi's privatisation efforts, which were lauded by investors.

HOW COULD THE FINANCIAL REGULATOR'S FOCUS CHANGE?

The regulatory Financial Services Agency has made the improvement of Japan's financial sector a top priority in recent years, although critics have said reforms have been too few and too late.

Aiming to woo back Western banks -- many of whom have trimmed their Tokyo operations -- the FSA has removed firewalls between banks and brokerages, rejigged tax laws for foreign funds and allowed a market for professional investors.

However under Kamei, a former police official, the FSA could once again clamp down on banks and brokerages for regulatory violations.

WHAT DO THE DEMOCRATS PLAN FOR JAPAN'S BANKS? The Democrats have promised to introduce a law that would help boost "local financing", as a means of helping out Japan's languishing rural areas and shell-shocked smaller companies.

But analysts have warned that such a law -- which would force banks to disclose information about their loans to small and medium-size companies -- would pressure banks to lend to ailing companies and spark more bad loans. Credit costs, which include money set side to cover bad loans, remain high at most Japanese banks. Credit costs at seven of the country's largest lenders totalled more than 450 billion yen ($4.9 billion) in the April-June quarter, representing a significant drag on earnings.

Kamei told reporters on Tuesday that he would like to introduce a moratorium on the repayment of the principal on mortgages and bank loans to help small and mid-sized businesses and individuals struggling from the economic downturn.

Kamei aims to encourage banks to grant a roughly 3-year moratorium on the repayment of principal as long as interest payments are being made. The moratorium would not be enforceable under the law, according to the Asahi newspaper.

WHAT IS PLANNED FOR CORPORATE GOVERNANCE?

The incoming government has said it will introduce a law to strengthen corporate governance and protect employees and other stakeholders of public companies.

Companies will be required to have independent directors make up a third of their boards and have employees represented on companies' audit committees.

WHY IS THE POSTAL SYSTEM A HOT TOPIC?

Japan Post [JP.UL], which holds $1.8 trillion in household deposits, became a symbol of Koizumi's push for privatisation and an end to using the agency to fund pork barrel projects. Critics say Koizumi's policies, which included deregulation of the job market, widened income gaps.

"I will fundamentally repair the... situation into which the people and the country fell because of Koizumi's politics and revise postal privatisation as a top priority," Kamei said at a news conference on Tuesday.

Koizumi's fans say his efforts were needed to shore up Japan's bloated finances and depoliticise the postal system.

Japan Post, a state-owned holding company, is supposed to float its savings and insurance units on the stock exchange as early as 2010 and sell out of them by 2017. The change in government and appointment of Kamei puts that in doubt. ($1=91.03 Yen)