Japan's top economic advisory panel proposed a new long-term fiscal reform target on Tuesday as the government ramps up spending to get the world's second-biggest economy out of its deepest recession of modern times. The shift comes at a time when Japanese bond yields are rising, mostly in tandem with US Treasury yields but partly due to concern that the cost of the government's huge stimulus spending could lead to an oversupply in the bond market.
Effectively putting a fiscal reform plan on hold for a decade, the advisory council said Japan should aim to eradicate its budget deficit outside debt issuance and services, the so-called primary budget balance, within 10 years. Japan's main ruling and opposition parties are vying to persuade voters they are best qualified to handle the country's finances, but critics say they share a fatal flaw - lack of a credible plan to cut the massive public debt.
Whoever wins an election that is just months away, worries about the country's long-term fiscal health could add to concerns over short-term spending, boosting interest rates and raising the cost of financing ballooning government spending. Japan's fiscal condition is the worst among major economies, and the government expects the ratio of its long-term debt to gross domestic product to hit 170 percent by the end of 2009/10.
A plan to achieve a primary balance by 2011/12 now looks impossible as the government aims to sell a record 44 trillion yen ($447.8 billion) of new debt in the fiscal year to next March to finance regular spending as well as stimulus packages. With the Japanese economy mired in its worst recession since the World War Two tax revenues are seen diving, causing a huge shortfall in public finances.
"It's regrettable we couldn't achieve our initial target. But big changes in the global economy were beyond what we could control," Finance and Economics Minister Kaoru Yosano told reporters after the panel's meeting. "We must not lose sight of our goal and drive to restore fiscal health." Yosano said the government could not say now by how much Japan's consumption tax, currently at 5 percent, would need to be raised to achieve the new fiscal target.
The country's primary balance deficit is expected to rise to 8.1 percent of gross domestic product this fiscal year, up from 3.9 percent in 2008/09. Even excluding the latest stimulus, amounting to 15 trillion yen, Japan would have a deficit of 5.7 percent of GDP this year, according to the government's estimate. The advisory body, the Council on Economic and Fiscal Policy, said the government should aim to cut the deficit by half within five years.
If the economy steadily recovers from 2010/11, and if the consumption tax is gradually raised from 2011/12, the deficit will be halved by 2013/14, according to government projections. By 2021/22, Japan's primary balance will be in the black, according to the projection by the council. But in an adverse economic scenario where real growth will stay around 1 percent and if the consumption tax rate is not raised, the primary balance will remain in the red even by the early 2020s, the panel warned.
Once Japan has a primary surplus it can pay down its debt if it can roll over maturing debt at the same interest rate levels. But bond yields have been rising in recent months globally, notably in the United States, and some market players say this stems from growing concerns about deteriorating fiscal conditions.
Although Japan's public debt has kept ballooning for the last decade after attempts to boost the economy by deficit spending, interest payments on the debt have been kept in check thanks to low bond yields. Japanese 10-year government bond yields have hovered below 2.0 percent during the past decade. They stood at 1.525 percent on Tuesday, more than 2 percentage points below the yield of 10-year US Treasuries.
While huge savings by Japanese households have helped to keep a cap on Japanese bond yields, some market players are concerned Japan may not be able to depend on savings as its population is rapidly ageing. The government's plan is expected to be formally approved by the cabinet later this month after consultations between the government and ruling party officials, the Nikkei business daily reported.
Comments
Comments are closed.