Kan Engulfed by Political-Donation Turmoil as Japan Policy Paralysis Grows

Japan’s Prime Minister Naoto Kan sought to head off calls for his resignation amid turmoil over political donations to ruling-party members that threatens to leave the government without statutory funding for months.

Kan told lawmakers today he “had no idea” a political contributor to his office wasn’t a Japanese citizen, violating campaign rules. The Asahi newspaper reported Kan received 1.04 million yen ($12,500) from a South Korean resident. A similar charge prompted the foreign minister to resign March 6.

With opposition parties already calling for Kan to step down and refusing to pass bills authorizing sales of deficit- financing bonds, the tumult risks prolonged paralysis in the Diet. Political failure to set a path for reining in the world’s largest public debt has spurred credit-rating firms to lower, or put on notice for a cut, Japan’s sovereign grade.

“I thought it couldn’t get any worse, but it just did,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “If it gets to June, July and the deficit-bond bill still hasn’t passed, we’ll start to see more doubts about Japan’s ability to finance itself, and bonds may face a sell- off” that sends benchmark 10-year yields as high as 1.6 percent, he said.

Bond investors have yet to show signs of concern, with the yield on the benchmark security due in 2021 slipping to 1.285 percent at 2:17 p.m. in Tokyo from 1.295 percent late yesterday. Yields are heading for a weekly drop. The Nikkei 225 (NKY) Stock Average fell 0.9 percent amid concern about the global economic outlook following a gain in U.S. jobless claims.

Maehara Resignation

Kan today told parliament the donation came from someone with a Japanese name and his office was checking the report.

“If it’s confirmed that this person is a foreigner as reported, I will return the entire amount,” he said.

Seiji Maehara resigned on March 6 as foreign minister after admitting he accepted 250,000 yen from a South Korean woman in Kyoto. Thousands of ethnic Koreans who have lived in Japan their entire lives and have Japanese names don’t hold citizenship.

Maehara’s departure was the latest blow to a government engulfed by finance scandals, diplomatic disputes and a parliamentary stalemate over authorizing 44.3 trillion yen in government bonds to fund the budget for the year beginning April 1 and service Japan’s debt.

‘Quite Severe’

Kan, whose popularity has plummeted amid dissent within his Democratic Party of Japan, has repeatedly rejected calls for a snap election. He has also refused to resign and become the fifth straight premier to last no more than a year.

“This is quite severe for Kan as he just accepted Maehara’s resignation,” said Atsuo Ito, a political analyst and author of a book on the DPJ. “He may be forced to step down. It’s possible for this kind of issue, separate from the policy debates and the conflicts between ruling and opposition parties, to lead to a leadership change.”

Kan “isn’t thinking at all about” quitting, Chief Cabinet Secretary Yukio Edano told reporters.

“Mr. Maehara made his own decision,” Edano said. “If it turns out the money came from a foreigner, the money should be naturally returned and that will be sufficient.”

Japan’s lower house of parliament passed Kan’s record 92.4 trillion yen budget on March 1. Passing the budget financing bills requires approval of either the opposition-controlled Upper House or a two-thirds majority in the Lower House, which the DPJ lacks. The opposition, including the Liberal Democratic Party that was ousted from more than 50 years of almost unbroken power in 2009, has refused to compromise.

Approval Rating

Moody’s Investors Service on Feb. 22 lowered Japan’s debt rating outlook on concern over the political gridlock. Standard & Poor’s cut Japan’s debt rating in January, citing the stalemate. Failure to pass the legislation could cause bond yields to rise, damaging an economy already hampered by social security costs that have increased by more than 60 percent since 2000. The country’s debt is approaching 200 percent of gross domestic product.

Kan also faces dissent within his party over a push to raise the sales tax to address Japan’s finances. Sixteen DPJ lawmakers who oppose a tax increase abstained from voting on the budget. The legislators are loyal to former party leader Ichiro Ozawa, whose suspension from the DPJ over unrelated campaign financing violations spurred a backlash.

The administration’s approval rating dropped to 24 percent, the worst since Kan took office in June, from 27 percent last month, the Yomiuri newspaper said on March 7. The nationwide telephone survey of 1,052 voters was taken between March 4 and March 6, the report said, without providing a margin of error.

To contact the reporters on this story: Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net; Aki Ito in Tokyo at Aito16@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net