JAPAN: Kan Jolts Yen On First Day As FinMin

01.07.10, 05:43 AM EST

TOKYO -- Japan's new finance minister is wasting little time making waves, jolting the foreign exchange market Thursday by calling for a weaker yen as doubts surface about his ability to guide a recovery in the world's No. 2 economy.

In unusually explicit remarks for a Japanese finance minister, Naoto Kan vowed to work closely with the central bank to steer the currency toward an "appropriate" level around 95 yen to the dollar.

He welcomed the yen's recent retreat from the 14-year high of 84.83 to the dollar hit in November but indicated it hadn't fallen far enough. "I hope currency markets correct themselves further, weakening the yen," he said.

That sent the dollar surging to a high for the day of 92.87 yen from 92.20 yen just before the comments.

Prime Minister Yukio Hatoyama formally installed Kan as new finance minister Thursday, replacing an experienced fiscal conservative with a popular politician known more for candor and mettle than crafting economic policy.

Kan takes over from Hirohisa Fujii, whose health problems led the 77-year-old to resign Wednesday after just four months as the top finance official.

Kan, who will retain his post as deputy prime minister, is an unlikely appointment. While the choice may lift the government's sagging public approval ratings, his background and outspoken views are already causing anxiety about Japan's fragile recovery.

The 63-year-old is a vocal advocate of slashing public works spending - a key component of Hatoyama's economic stimulus - and will instead appropriate money for social programs. Investors worry that such spending could rise, swelling Japan's already massive public debt, given Kan's opposition to Fujii's insistence on capping government bond issuance to 44 trillion yen ($475 billion) next fiscal year.

He has also been critical of the Bank of Japan, which he views as too optimistic on the economy.

A former health minister, Kan gained prominence in Japan for exposing in 1996 a government cover-up of HIV-tainted blood products that caused thousands of hemophilia patients to contract the virus that causes AIDS.

He may have credibility as a social activist, but observers wonder whether Kan is up to the task of stemming deflation and bolstering growth.

"Unlike Fujii ... Kan does not seem to have a good background on economic and fiscal policy," said Masaaki Kanno, chief economist at JP Morgan Securities Japan.

"Unless Kan shows strong leadership to organize growth strategies, involving the BOJ, Japan's economy will not be able to get out of the trap of deflation and mounting government debt."

Fujii, by contrast, was a career bureaucrat in the Finance Ministry and had previously served as its chief in 1993-94.

The role of the finance minister will be crucial to boosting the government's popularity ratings, which have tumbled since the Democrats swept into power in September. Japan's economy has been hobbling toward a weak recovery since the 2008 financial crisis, and public debt is ballooning to near 200 percent of gross domestic product.

Hatoyama himself has taken personal blows as he battles a campaign contribution scandal, and tries to shake off a reputation for indecisiveness over moving a major U.S. military base on the southwestern island of Okinawa.

The prime minister had wanted Fujii, the oldest Cabinet member, to remain in the finance post and asked him stay to help push the budget through parliament.

Fujii, who has a history of high blood pressure, spent several tough weeks late last year churning out a record 92.29 billion yen ($1 trillion) spending plan. The government is also trying to pass a 7.2 trillion yen ($78 billion) stimulus package.

The budget's fate will be Kan's first major test once the Diet convenes on Jan. 18.

"I believe we will sufficiently make it through the Diet session," Hatoyama said, expressing confidence in his new pick.

Although currency markets reacted Thursday, bond and stock markets remained relatively quiet, holding back to see what Kan actually does. In the longer-term, the new finance minister will need to tackle Japan's mountain of debt, said Kyohei Morita, chief Japan economist at Barclays ( BCS - news - people ) Capital in Tokyo.

"We hope he will work earnestly toward that goal with an understanding that there are no short cuts," Morita said in a report. "A more cautious handling of market communications would also be appreciated."

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