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Sat, 08/02/2008 - 09:13
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FOCUS: Analysts warn Japan not ready for tax hike after Cabinet reshuffle

TOKYO, Aug. 2 Kyodo - Japanese Prime Minister Yasuo Fukuda on Friday selected strong advocates of a consumption tax hike as his new economic ministers in what may be his last opportunity to lift a languishing economy and a hugely unpopular government.

But market analysts quickly questioned the appointments, arguing that a hasty tax increase would drive away voters and strike a blow to the Japanese economy and companies, already hit by soaring oil and raw material prices.

''It would be quite difficult for the current Japanese economy to accept a shift toward a tax hike,'' said Mitsuru Saito, chief economist at Tokai TokyoSecurities Co.

''From the perspective of the general public, they are already being slapped with a tax increase from rising prices for oil, natural resources and food,''he said.

In Friday's Cabinet reshuffle, Fukuda appointed Bunmei Ibuki, former Liberal Democratic Party secretary general and a former official at the Finance Ministry, as finance minister, while former Chief Cabinet Secretary KaoruYosano was given the post of economic and fiscal policy minister.

Yosano led an LDP study group on fiscal reform which called for the consumption tax to be raised to at least 10 percent in the mid-2010s from the current levelof 5 percent to meet ballooning social security costs.

''With the rise in commodity prices and sluggish purchasing power, a tax hike could have a further adverse impact on consumption,'' said Masafumi Yamamoto,head of foreign exchange strategy at the Royal Bank of Scotland.

In addition to cost pressures from skyrocketing raw material prices, many export-dependent Japanese companies are being forced to downgrade their earnings due to a slowdown in the subprime-hit U.S. economy and a weakeningdollar.

In an inauspicious sign for Fukuda's attempt at a fresh start, Tokyo stocks plunged over 2 percent on Friday with the key Nikkei index shedding over 22percent from a year ago.

''It demonstrates the absence of any expectations for this Cabinet reshuffle,''said Fumiyuki Nakanishi, chief equity strategist at SMBC Friend Securities Co.

Nakanishi said foreign investors were likely to be disappointed by the familiar lineup of veteran politicians, geared more toward collective harmony thaninnovative change.

''Foreign investors pulled away from Japan because they sensed an anti-reformcolor (in the former Cabinet),'' Tokai Tokyo's Saito said.

''The views of people overseas will become harsher if they feel that this Cabinet is biased toward bureaucratic inclinations,'' he said, suggesting Ibukiis likely to favor opinions advocating a tax hike in the Finance Ministry.

But with Japan's outstanding long-term debts expected to reach 148 percent of gross domestic product by next March, other analysts said foreign investors are not necessarily averse to a tax increase as a long-term solution for a nationweighed down by a rapidly aging population and a shrinking birthrate.

''Foreign investors are actually hoping for (a consumption tax hike) to maintain the social security system and to avert fiscal bankruptcy,'' saidNaoki Kamiyama, Japan equity strategist at Morgan Stanley in Tokyo.

The worst-case-scenario, however, would be if Fukuda signaled a lifting of the taboo on a national tax debate only to dash hopes later due to the fear that his historically-low popularity levels would sink further before a crucialgeneral election, which needs to be held by September next year at the latest.

''It would be hopeless for a Cabinet to be launched in the direction of successfully raising the consumption tax for fiscal and social security reformsand then to fail,'' Kamiyama said.

''The most likely scenario is that the Cabinet will end up doing nothing andwill be rebuffed by the markets,'' he said.