Japanese Prime Minister Yasuo Fukuda said on Tuesday the government would stick to its goal of balancing its budget by 2012, countering political pressure from within his own party for it to be postponed as a slowing economy makes tax hikes a tough sell. In a sign of the growing debate, a top ruling party official and rival to Fukuda said the economy was already in recession and the target may need to be put off.
"I don't feel it so much in Tokyo, but when I go to the regions I get the feeling that the economy is in a recession," Taro Aso, secretary-general of the ruling Liberal Democratic Party, told reporters. "I wouldn't choose the option of placing priority on achieving a primary balance and then having the economy deteriorate."
Aso missed out on the leadership to Fukuda in a vote last year and is widely seen as a leading contender if the prime minister, plagued with low poll ratings, loses his job. The government, worried about the effect on small companies of rising raw material costs, is preparing a package of economic measures, although the economics minister said any additional spending would not be lavish.
A huge government debt pile - around 1-1/2 times Japan's gross domestic product - and ongoing annual budget deficits are constraining the government despite fears the jump in oil and commodities prices will tip the country into recession. A senior LDP policy official said Japan would need to hike the consumption tax to around 8 percent from the current 5 percent to balance its public finances while Fukuda acknowledged that achieving the fiscal target would be difficult.
"But it's very important to be ready to use whatever means available to achieve the target, and we hope to meet it," Fukuda told reporters. The target is to get the government's primary balance - its spending excluding debt servicing costs - into the black by the fiscal year to March 2012. Japan's government currently forecasts a deficit of 3.9 trillion yen ($36 billion), or 0.7 percent of gross domestic product, in 2011/12 even if economic growth kept accelerating.
With Japan now potentially lapsing into recession - widely defined around the world as two quarters of contraction in GDP but calculated slightly differently in Japan - the target of reaching a balance may slip further back. The target is important in Japan, as a rapidly ageing population threatens to blow out pension and health spending.
Aso also said there was no need to be fixated on limiting new government bond issuance every year to 30 trillion yen - a limit pledged by former prime minister Junichiro Koizumi as a symbol of his determination to cut government debt. Finance Minister Bunmei Ibuki said he shared Aso's view that meeting the 2011/12 fiscal balance target was hard, but added the government needs to stick to the target since it was a binding decision made by the cabinet in the past.
"It is my responsibility as finance minister to make efforts to overcome" difficulties in achieving the target, he said. The government faces an election by September next year, at the latest, adding to political pressure with opposition parties already seeking to label the LDP as the party of higher taxes.