Japan's government may need to issue more bonds or drop some of its spending plans as it faces a shortage of up to 7 trillion yen ($78 billion) in funds in the year to March 2012, the Nikkei newspaper reported. An increase in bond issuance may raise the spectre of a cut in Japan's sovereign ratings as the nation's public debt grows close to 200 percent of its gross domestic product, analysts say.
The Democratic Party-led government plans to issue a record 44 trillion yen in new bonds in the budget for the business year beginning in April. The government may need to issue more than that amount in the following fiscal year from April 2011 as it faces 6 trillion yen to 7 trillion yen in fund shortages if it were to meet the party's election pledges when tax revenues are shrinking, the Nikkei said on Tuesday without citing sources.
The government would have to reduce spending, raise taxes or increase new bond issuance to cover the shortfall, the paper said. "The government has said it will launch a fiscal framework this year, and that could be the trigger for a downgrade if it doesn't go well," said Nobuto Yamazaki, executive fund manager at DIAM Asset Management in Tokyo.
"There is also the possibility the government will alter its campaign pledges, because even the general public accepts that some of what the government is promising is unrealistic." Ratings agencies have warned Japan must do more to address the debt or risk downgrades.
But the government is now facing calls from outspoken banking minister Shizuka Kamei, head of a small coalition party, for more spending to stimulate the fragile economy. Prime Minister Yukio Hatoyama has rejected such calls, helping markets shrug off Kamei's comments. But analysts say pressure for more spending may grow if the Democrats fare badly in an upper house election expected in July.