Japan downplays fiscal toughness

Japan should not prioritise fiscal discipline above other concerns, National Strategy Minister Yoshito Sengoku said on Friday, raising doubts whether the government will tighten its grip on bulging public debt. Bond investors are worried about Japan's runaway debt, which is nearing 200 percent of GDP, and fear the Democratic Party-led government may decide to increase fiscal spending further to bolster the economy ahead of a mid-year election.
"We would lose out if we were to solely focus on fiscal discipline," Sengoku, also administrative reform minister, told Reuters in an interview. Sengoku, 64, is in charge of crafting a medium-term fiscal reform strategy by June. But the five-month-old government is trapped between the need to deal with the mounting public debt and to prevent the economy from slipping back into recession.
"We are not sure if we can come up with numerical targets for fiscal reconstruction because we need to monitor the economic situation a little longer," he continued. Japan's government has compiled a record budget for the year starting April that will inflate the country's already huge debt by $484 billion, as tax revenues slide in the aftermath of the financial crisis.
Sengoku said the planned fiscal reform strategy would prove "useless" if it did not factor in tax revenue estimates and the economy's performance, adding it is "meaningless" to gauge public debts solely in comparison to GDP. Standard & Poor's last month cut the outlook on Japan's AA debt rating to negative, saying the policy bind could lead to a downgrade unless measures were taken to stem fiscal and deflationary pressure.
Sengoku, however, said that he is not worried about the possible sovereign debt downgrade, noting Europe and the United States in "worse positions" with more debt problems like those facing Greece likely to arise in those regions. "We need to recognise first and foremost that the global economy is still in an abnormal state, when we think about fiscal discipline" he said.
Sengoku suggested Japan is unlikely to start unwinding unconventional policy taken in response to the financial crisis over the coming year because the economy is plagued by deflation. Rather, calls for expansionary fiscal policy for boosting demand are certain to arise, as are those for further monetary easing such as increases in the Bank of Japan's government bond purchases, he said. "Incomes are falling in local areas. People in those area would be angered if the government were to take exit strategies," the minister said.