(Bloomberg)
Japanese Prime Minister Naoto Kan plans to cap new bond sales at 44.3 trillion yen ($534 billion) in 2011 to finance a record budget as he tries to spur corporate demand and bolster growth.
The country’s budget will climb to 92.4 trillion yen in the year starting April 1, according to a proposal approved by the Cabinet in Tokyo today. Kan has pledged to keep bond sales unchanged for three years to curb the industrialized world’s largest debt burden.
Kan’s budget juggles the need to stimulate demand in an economy hit by the yen’s climb to a 15-year high and deflation, and bring down a debt burden about twice the size of gross domestic product. Increasing the sales tax to improve Japan’s finances may not be feasible because it may risk a further decline in his popularity, Nikko Cordial Securities Inc. said.
“Given the political situation, it will be difficult for Kan to discuss a sales tax increase,” said Hidenori Suezawa, chief strategist at Nikko Cordial Securities in Tokyo. “There’s no doubt the government will have a tougher time compiling the budget next year as social-security costs swell and it runs out” of revenue sources.
Japan’s economy is expected to contract this quarter as government stimulus measures that bolstered spending expire and the strong yen threatens exporter profits. The government said this week it was forecasting growth to slow to 1.5 percent next fiscal year from 3.1 percent.
Job Cuts
JVC Kenwood Holdings Inc., a Japanese maker of audio equipment, video cameras and televisions, said today it plans to eliminate 500 jobs at its Victor Japan unit because the yen’s appreciation and Asian competition have reduced revenue.
The yield on the benchmark 10-year bond rose to 1.16 percent at 6:56 p.m. in Tokyo. The yen traded at 82.90 as of 6:57 p.m. It has dropped 2.9 percent against the dollar from a 15-year high of 80.22 reached Nov. 1.
The government also said today it plans to add 5 trillion yen to a 145 trillion yen reserves pool set aside for currency intervention, after Japan sold yen for the first time in six years on Sept. 15.
Japan’s primary deficit narrowed to 22.7 trillion yen from 23.7 trillion yen, the Finance Ministry said, equivalent to about 4.7 percent of GDP. Kan wants to post a primary balance, which can be achieved when revenue matches spending, excluding bond sales and interest payments, by 2020.
Shrinking Revenue
The government expects new bond issuances will exceed tax revenue of 41 trillion yen for a second consecutive year. Japan’s receipts from levies have shrunk more than third after peaking at 60.1 trillion yen in 1990.
Sales of all bonds and notes including those rolling over maturing debt will rise to 144.9 trillion yen next year from 144.3 trillion yen, according to the proposal. Nikko’s Suezawa said the amount of bond sales was within expectations and will have limited market impact.
Kan will submit the budget bill to parliament, where it’s almost certain to be approved because his ruling party controls the more powerful Lower House.
Lack of Leadership
The premier tapped some 7 trillion yen from unused accounts and reserves to pay for the plan, including money from a foreign-exchange reserves account and accumulated funds belonging to a government-affiliated railway agency. Finance Minister Yoshihiko Noda has said the government needs to find a more sustainable source of funds.
“Such extraordinary debt and low tax revenues obviously point to the need to raise levies, especially sales tax,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “The real obstacle is a lack of political leadership.”
The ruling Democratic Party of Japan lost ground in mid- term elections in July after Kan proposed increasing the nation’s 5 percent sales tax to restore finances. Kan’s Cabinet approval ratings fell to 21 percent, the lowest since taking the office in June, the Asahi newspaper reported on Dec. 13.
To meet Kan’s budget guidelines, the DPJ abandoned its pledge of doubling childcare handouts to households, limiting the increase to families with children under three-years old.
‘Worrisome’ Initiatives
Yoshimasa Hayashi, a lawmaker of the opposition Liberal Democratic Party, said Kan’s spending plans are increasing the risk of a bond market collapse and his Cabinet needs to implement more aggressive measures to restore the nation’s fiscal health. “There are many worrisome spending initiatives” in the budget proposals, he said in a Dec. 20 interview in Tokyo.
Japan’s bond yields are the lowest in the world, according to data compiled by Bloomberg covering 32 markets. About 95 percent of holders are domestic investors. A total of 908.8 trillion yen of Japanese government bonds are outstanding, making the country the world’s largest debt market.
Japan is one of four advanced economies along with Greece, Italy and Portugal, facing the biggest risk of needing drastic budget cuts to avoid uncontrollable increases in debt, according to an IMF report in September.
The nation’s aging population is also putting strains on its coffers. Social-security expenses, which have increased more than 60 percent since 2000, will account for 53 percent of general spending next year. Households receiving welfare payments rose to a record 1.4 million in September since the data were compiled in 1951, according to the Welfare Ministry.
No Good News
The Japanese government has said it plans to lower corporate taxes by 5 percentage points next year to stimulate business investment and employment without securing funds to fill about 1.5 trillion yen of revenue losses. That may be a sign that Japan is loosening its commitment to reduce its debt, said Azusa Kato, an economist at BNP Paribas in Tokyo.
“I have to say Japan’s fiscal risk is increasing considering the budget proposal and tax guidelines,” Kato said. “It’s very hard to find good news.”
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
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