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Japan prepares expansionary budget outline without spending caps

[TOKYO] Japan's cabinet is expected to approve by Friday the outline of a 2016/17 budget that will not set any cap on spending requests from ministries, ruling party lawmakers said, reflecting the priority given to growth over fiscal restraint.

Prime Minister Shinzo Abe swept to power three years ago promising to pursue expansionary monetary and fiscal policies, and bring reforms that would lift the economy out of the deflationary rut it had been stuck in for the previous 15 years.

The outline of the 2016/17 budget will be based on fiscal guidelines mapped out last month that called for limiting rises in general-account spending for the next three years, but stopped short of setting a binding target.

"I think next fiscal year's budget will be more expansionary as the government wants to secure solid economic growth before the sales tax hike planned in April 2017," said Chotaro Morita, head of Japan rates strategy at SMBC Nikko Securities.

"Without a cap on budget requests, political pressure for more expenditure could mount in areas such as public works, support for farmers who will be affected by TPP (a trans-Pacific free trade pact), and revival of rural regions," Mr Morita said.

Based on the outline, ministries and government offices will submit their budget requests for the next fiscal year by the end of August, giving the finance ministry time to scrutinise them before the government drafts an annual budget in late December.

The ministries are likely to request spending budgets totalling over 100 trillion yen, highlighting how hard it is for Japan to rein in public debt that is already twice the size of its economy, and easily the largest in the developed world.

The budget for the current fiscal year hit a record 96.3 trillion yen.

Bond traders, however, do not expect the increased spending to result in a sharp increase in government bond issuance, as the government can expect increased tax revenues, thanks to an economic recovery.

Should the economy deteriorate, however, the government might need to rework its numbers.

"There's a risk that rating agencies could downgrade Japan's credit rating if the economy falters, forcing the government to put off the planned tax hike," Mr Morita said.

An increase in the sales tax hike to 8 per cent from 5 per cent last year tipped the economy into a recession as it hit consumers harder than expected. Stung by the downturn, the government delayed a second planned increase 10 per cent by 18 months to April 2017.

To sustain growth in the world's third largest economy, the government will set aside roughly 4 trillion yen in next year's budget for growth areas, while curbing discretionary spending, according to the budget outline.