The political turmoil could delay efforts to thrash out plans due out this month to cut the country's public debt, which stands at nearly 200 percent of GDP, and a strategy to engineer growth in an ageing society. But if, as many expect, fiscally conservative Finance Minister Naoto Kan takes the helm, that could raise the chances of bolder steps to rein in debt, including a pledge to consider raising the 5 percent sales tax.
Hatoyama's Democratic Party of Japan (DPJ) made history with a landslide election win last year, promising to change how Japan is governed after more than 50 years of cosy ties among bureaucrats, companies and lawmakers under the Liberal Democrats.
But after eight months of indecision and broken promises, the 63-year-old Hatoyama nicknamed "The Alien" for his quirky comments bowed to pressure from his party to quit ahead of an election for the upper house of parliament expected in July that it must win to smooth policymaking.
An election loss would not oust the DPJ-led government given its majority in the more powerful lower house, but the ruling bloc needs a majority to keep legislation from being stalled. With tears in his eyes, Hatoyama told party lawmakers that he and party secretary-general Ichiro Ozawa would resign.
"In order to revitalise our party, we need to bring back a thoroughly clean Democratic Party. I would like to ask your cooperation," Hatoyama said. Hatoyama's ratings had nosedived on voter doubts about his leadership, while the old-style image of Ozawa, seen as pulling strings behind the scene, had also eroded public support.
FINANCE MINISTER KAN NEXT?
Analysts have tipped Kan as frontrunner to replace Hatoyama, who becomes Japan's fourth straight leader to leave office after a year or less. A new leader will be chosen on Friday and a new cabinet is likely to be formed on Monday, quicker than many had feared. The yen slipped to 91.78 per dollar from around 91.10 on the news, before trimming losses.
The Nikkei share average, which initially gained as the yen weakened, later turned down, and bond futures edged higher. The likely selection of Kan, who made his name battling bureaucrats during a stint as health minister, would be welcome by investors and voters worried about Japan's public debt, although lawmakers up for re-election will probably be cautious.
"Whether he gets his way at this juncture is hard to tell," said Koichi Nakano, a Sophia University professor. The short-tempered Kan has in the past pressed the Bank of Japan to do more to fight deflation and been positive about raising the 5 percent sales tax in the future to fund bulging social welfare costs.
"If Finance Minister Kan takes over, it would be welcome news for the JGB market because Kan is more proactive about fiscal discipline and about raising the consumption tax than any other cabinet minister," said Hirokata Kusaba, economist at Mizuho Research Institute. Kan surprised markets earlier this year by saying he wanted the yen to weaken more and that most businesses were in favour of a dollar/yen rate around 95 yen.
Since then he has mostly toed the ministry line that stable currencies are desirable and markets should set foreign exchange levels. The BOJ, which has called for a credible government plan to rein in Japan's huge public debt, is worried policy stalemate will delay fiscal reform. But the political vacuum will give the central bank breathing space and ease government pressure for further action on deflation, at least until after the election.
ELECTION BOUNCE
Some analysts said the change of the party's top two leaders would give the Democrats a boost before the election, but most expect the party and its small ally, the New People's Party, to still fall short of a majority in the lower house. "A big reason for the falling support was the Hatoyama-Ozawa duo," said Tsuneo Watanabe, a senior fellow at the Tokyo Foundation think tank.
"Now that they have gotten rid of both, they can appeal to voters that they can govern better." Optimists say a new post-election coalition might even be more consistent on policies, such as the need to rein in debt.
It was not clear if Hatoyama's departure would have any impact on the government's ambitious goal to cut greenhouse gas emissions by 25 percent from 1990 levels by 2020, more than triple the amount the previous government had proposed. Hatoyama took office in September with ratings of over 70 percent from voters hoping the party would make good on promises to cut waste, pry policy control away from bureaucrats, and put more money in consumers' hands to boost domestic demand.
But doubts over his leadership skills helped erode the government's approval ratings, with one poll showing support at just 17 percent after he failed to keep a campaign pledge to move a U.S. airbase off Okinawa island in southern Japan.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ