Japan's government has agreed to make lowering the ratio of debt to gross domestic product a new fiscal discipline target, which makes it easier to avoid spending cuts as long as the economy keeps growing. The government said it was not abandoning its previous target of reaching a primary budget surplus in fiscal 2020, but many economists have written this off after repeated delays in raising the nation-wide sales tax.
The new target is a subtle shift in policy that poses large risks. The government has more freedom to spend big and avoid raising taxes, but this could eventually complicate the Bank of Japan's government debt purchases for quantitative easing. "If you focus on the debt-GDP ratio, you can just talk about expanding the denominator, but it is not that easy to raise trend growth," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
"The BOJ may not be able to exit when the time comes if the fiscal situation is not in order." The new fiscal discipline target is part of Prime Minister Shinzo Abe's annual roadmap for fiscal and economic policy, which his top advisory panel approved after a meeting on Friday. Abe's cabinet is likely to formally sign off on the roadmap at the end of next week.
In this year's roadmap, lowering the debt-GDP ratio has been elevated to the same status as achieving a primary budget surplus, which excludes debt servicing costs and income from bond sales. "The goal is to achieve a primary budget surplus and lower the debt-GDP ratio at the same time," Abe said at the end of the advisory panel's meeting. In comparison, last year's roadmap mentioned the debt-GDP ratio merely as a footnote.
The change simply reflects Abe's recent comments in parliament that he wanted to focus on the stock of debt as well as fiscal spending flows, said government officials who briefed reporters on the roadmap. Since last year, Abe, some of his advisers and some cabinet ministers, have made comments suggesting that returning to a primary budget surplus is not such a high priority.
Japan's debt burden is the worst among major countries at more than twice the size of its GDP due to decades of public works spending to pump-prime a listless economy. However, some economists say the debt-GDP ratio is likely to improve because the economy has been growing in nominal terms since Abe took office in December 2012. Indeed, the International Monetary Fund expects Japan's debt-GDP ratio to peak at 239.4 percent in 2018 and then fall to 232.4 percent in 2022.
Other economists are not as sanguine because of the potential impact on the BOJ. The central bank has been slowing its government debt purchases recently, stirring speculation the BOJ could be looking for an exit from quantitative easing that has been in place since April 2013. If investors start to expect a big increase in fiscal spending, that could cause yields to spike, making it difficult for the BOJ to stop purchasing government debt altogether.
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