The resignation of Japan's finance minister Hirohisa Fujii citing health pressures sent the government of Yukio Hatoyama into a spin just when it least needed it, on the eve of discussion of the budget in parliament. Within minutes of taking over, the new minister, Naoto Kan, blundered into a minefield in making comments on the value of the yen, for which he was promptly upbraided by the prime minister. Kan broke the golden rule that finance ministers and central bank governors should never comment on particular foreign exchange rates. Yet here was Kan immediately on taking over as Japan's sixth finance minister in 18 months declaring that he would like the yen to weaken 'a bit more' and actually setting 95 to the US dollar as an appropriate rate that Japanese industry would prefer. One good reason for finance ministers not to comment is that global foreign exchange markets with daily trading volume of almost US$4 trillion are big and liquid enough to make them look like fools. Kan might have responded that he did little harm, and managed to nudge the market in the right direction, since the yen weakened to 93-94 against the dollar after he had spoken. But Hatoyama's comment that, 'The government, at least as far as I am concerned, basically has no need to comment on currencies,' drew attention to Kan's gaffe and to the wisdom of appointing him as minister. Kan responded with a sort of apology, saying that 'currencies of course should be determined by markets'. The strength of the yen, still 17 per cent higher than it was two years ago, is damaging Japan's exporters and holding back the country's growth. Banks and big companies said they would feel comfortable with the yen at 95-100 against the dollar. Although Japan's finance ministry and the International Monetary Fund and other economists see Japan returning to growth this year, it will be just 1 to 1.5 per cent. If the yen remained at the 14-year highs against the dollar reached in November, there was the danger of falling profits, falling prices and weakening consumer spending forcing the economy into a downward spiral. Kan's immediate task is to steer the record 92.3 trillion yen (HK$7.8 trillion) budget through parliament. Hatoyama cut three trillion yen off the budget requests and pleaded weakly for going back on election promises that 'this was the best we could do in order to maintain fiscal discipline'. Even so, the government will sell 44.3 trillion yen of new debt to fund the revenue shortfall. The budget gap has risen from 2.5 per cent of gross domestic product two years ago to 10.5 per cent. Given government debts amount to more than 200 per cent of GDP, the highest in the world, resistance to new debts is beginning to be seen in rising spreads on 30-year government bonds. Fujii was widely regarded as the best candidate for finance minister because he had held the office before and had a reputation both as fiscally conservative and politically strong enough to resist demands for spending. As a former finance bureaucrat, he also had an important role as a bridge between the bureaucrats and strident critics within the Hatoyama government who want to cut the bureaucrats down to size. Kan's reputation is the opposite. As health minister in the 1990s, he won his spurs by exposing the role that the ministry had played in allowing 5,000 Japanese to contract HIV by receiving contaminated blood. But behind all the questions of economics is the political cloud of the so-called 'Shadow Shogun' Ichiro Ozawa, and whether the government is being run by Hatoyama or by Ozawa, the secretary-general of the ruling party. Persistent press reports in Japan say that ill health was only the excuse for Fujii to quit and that the real reason was that he was fed up with Ozawa's power over Hatoyama. These reports say that Kan got the job only because other candidates were in Ozawa's bad books - which means that the new minister has to watch the economy, the yen, the prime minister and Ozawa, a tough task.