Japan to announce record budget despite huge fiscal deficit

Tokyo

TAKING advantage of improved tax revenues, the Japanese government will announce a record 96.7 trillion yen (S$1.1 trillion) budget for fiscal 2016 despite its need to reduce a colossal burden of outstanding debt, Finance Minister Taro Aso has confirmed in advance of a Cabinet meeting on Thursday which is due to endorse the spending.

Tax revenues are now estimated at a 25-year high of 57.6 trillion yen in the fiscal year beginning April 1, 2016 owing mainly to an improvement in corporate profitability among Japanese firms, especially large exporters who are benefiting from a weaker yen.

This means that the government will be able to finance the additional spending while also cutting issuance of new Japanese Government Bonds (JGBs) by 2.4 trillion yen to 34.4 trillion compared to the current financial year, Mr Aso indicated.

News of the planned spending boost is likely to cause concern, however, in financial markets and among organisations that monitor the global economy, because outstanding government debt in Japan is already the highest among advanced nations at around 230 per cent of gross domestic product (GDP).

Mr Aso insisted on Tuesday that the government is making progress towards its previously announced target of achieving a primary budget surplus (where revenues minus new borrowing match spending less debt service costs) by the end of fiscal 2021.

"This budget is appropriate for marking the first step towards our new fiscal plan while we aim for economic revival and fiscal consolidation at the same time," Mr Aso told a briefing after he presented the budget figures to a meeting of government officials and members of the controlling Liberal Democratic Party.

Prime Minister Shinzo Abe told the meeting that his administration "has done the utmost to pursue both economic revival and fiscal reform", while noting that tax revenue has risen by 15 trillion yen and bond issue has fallen by 10 trillion yen since he took office in late 2012.

The decreasing level of new borrowing and rising tax income will bring the country's fiscal dependence on bond financing to 35.6 per cent in fiscal 2016 - the lowest since fiscal 2008, officials said.

The record fiscal spending planned for fiscal 2016 compares with initially announced spending of 96.3 trillion yen in the current fiscal year. It is based on budget assumptions that Japan will achieve nominal economic growth of 3.1 per cent or 1.7 per cent in real (inflation adjusted) term next year.

Some economists doubt that this figure can be achieved, given that inflation in the world's third-largest economy is running at an annualised monthly rate of around zero rather than the 2 per cent being targeted by the Bank of Japan (BOJ).

The lower the inflation rate, the lower the rate of nominal growth in the economy and since the BOJ's inflation target is based upon a consumer price index which includes energy prices, the crash in oil prices has pushed the inflation target seemingly out of reach.

Senior government officials have suggested recently, however, that the BOJ should "look through" oil prices when calculating the inflation rate and look instead at the underlying rate of price increases minus oil, which is running at around 1.2 per cent annually.

"If consumer prices were rising more than 1.5 per cent then I don't think you could complain when talking about the price target," Minister for Economic Revival, Akira Amari, was reported as saying on Tuesday, suggesting that targeted growth may in future be calculated on a different price basis.

Mr Amari also said that the government needs to see the economy shake off the impact of long deflation for it to be able to increase the national sales tax in fiscal 2017. Some analysts interpreted this as a hint that the Abe government may again delay the contentious sales tax rise.

Japan's potential growth rate is estimated by economists at around 1.5 per cent annually, but Mr Abe appears to be relying partly upon the assumed beneficial impact of Japan's membership of the Trans-Pacific Partnership (TPP) to boost growth rates.

According to reports on Tuesday in Japan's leading business daily, the Nihon Keizai Shimbun or Nikkei, the government has estimated that the TPP will boost the economy by 14 trillion yen or by around three percentage points, over the next few years.

This is a much higher estimate than that given when the country entered TPP entry negotiations two-and-a-half years ago. The new estimate includes the impact of elements such as common investment rules and easing of regulations, as well as a less damaging impact than feared on Japanese agriculture, the Nikkei said.