Japan recovery threatened by politics: S&P

Ratings agency Standard & Poor's on Tuesday warned that political uncertainty in Japan threatens to weigh on the country's recovery from recession. The political future of beleaguered Prime Minister Naoto Kan, pressured by low support ratings, is now seen to be even more precarious after his high-profile foreign minister Seiji Maehara quit over a donations row.
Kan - Japan's fifth leader in as many years - has said he would not dissolve parliament and call snap elections as repeatedly demanded by the conservative opposition. His government is seeking to push bills through parliament to fund the $1.1 trillion budget for the fiscal year beginning April 1. But the Liberal Democratic Party (LDP), which controls the upper house, will be able to block them, threatening a government shutdown by the summer.
Standard & Poor's said it does not expect "real GDP growth in 2011 to come close to precrisis levels, as political uncertainty in the country continues to weigh on its economic prospects". Japan's economy grew 3.9 percent in 2010, but Standard & Poor's said it expected the world's third-biggest economy to post growth of around 1.3 percent in 2011. It cited continued policy gridlock as a risk factor.
Referring to its two consecutive contractions of 6.3 percent in 2009 and 1.2 percent in 2008, it noted that "Japan's GDP has yet to recover to the 2007 level". For now, the government's biggest hurdle is to pass legislation enabling it to keep itself funded, a critical issue given that borrowing accounts for 48 percent of what it plans to spend in its primary budget in the fiscal year from April 1.
Capital Economics in a recent research note warned that "without the mandate to issue more debt the government will be hamstrung and could end up running out of cash by the summer". In January, Standard & Poor's cut Japan's credit rating for the first time since 2002, accusing the government of lacking a "coherent" strategy to begin easing the industrialised world's biggest debt at around 200 percent of GDP. Last month rival agency Moody's maintained the pressure as it lowered its outlook on Japan's sovereign debt to "negative".
Finance Minister Yoshihiko Noda said Tuesday the government must take care to prevent perceptions that it is not committed enough to fiscal consolidation, as such views could lead to disruptive rises in the premiums that investors demand to hold the country's debt. "We will make efforts to keep that from happening, while properly delivering our message," Noda said before a committee of the lower house of parliament. "The emergence of risk premiums would be the worst that could happen."