Japan's government laid out plans on Friday to suspend some state spending as it could run out of cash by October, with a deficit financing bill blocked by opposition parties trying to force Prime Minister Yoshihiko Noda into an early election. The impasse in Japan's parliament has raised fears among investors that the world's third largest economy is being driven towards a "fiscal cliff".
"The government running out of money is not a story made up. It's a real threat," Finance Minister Jun Azumi told a news conference, making a last-ditch appeal for co-operation by opposition parties to pass the bill. "Failing to pass the bill will give markets the impression that Japan's fiscal management rests on shaky ground," he said.
Unless the bill clears the current parliamentary session that ends next week, the government will start suspending or reducing some state spending to avoid running out of money for as long as possible, the finance ministry said on Friday. Noda's ruling Democratic Party passed the deficit-financing bill through the lower house on Tuesday. But the opposition boycotted the vote, signalling the bill has little chance of clearing the opposition-controlled upper house. Under the proposed contingency for suspending some spending, the finance ministry said government bond redemptions and interest payments on outstanding debt would not be affected as they will be made in full using reserves set aside for this purpose.
All state spending will be targeted, except for those that will severely effect public livelihood such as police, national security and disaster relief. Subsidies to local governments and state-run universities will be cut by half from the originally planned amount until the bill passes parliament, the finance ministry said. That may affect 4.1 trillion yen ($52 billion) in payment to local governments expected next Tuesday and may potentially disrupt money market flows, if the shortfall in disbursements is big.
In an attempt to ease the strain on markets, the Bank of Japan offered to supply a combined 2.4 trillion yen of one-month and four-month funds starting next Tuesday, of which 1.9 trillion yen was taken up. That was the biggest amount offered on a single day under the central bank's asset-buying and loan programme since it was put in place in October 2010.