Kan May Fail to Contain Japan Bond Sales, Boosting Case for Higher Taxes

Japanese Prime Minister Naoto Kan is projected to break his fiscal promise of capping bond sales as he struggles to secure revenue, boosting the case for higher taxes to contain the world’s largest public-debt burden.

Japan’s new bond sales will expand to 46.7 trillion yen ($563 billion) in the year starting April 2012, surpassing Kan’s target of 44.3 trillion yen, according to calculations by the Cabinet Office released in Tokyo today.

Breaking his year-old spending pledges may push up government borrowing costs of around 1.2 percent. The premier this month called for a national debate to raise the nation’s 5 percent consumption tax and tapped Kaoru Yosano, a former opposition lawmaker and finance minister, as his fiscal policy minister to push through changes needed to curb the debt load.

“It’s a miracle that Japan’s 10-year government bonds yields have remained at extremely low levels,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Raising the sales tax would reduce the risk of higher long-term interest rates, but the question is whether Kan can push it through amid falling popularity and opposition from members of his own party.”
The yield on the benchmark 10-year bond rose to 1.215 percent as of 9:22 a.m. in Tokyo. It touched 1.26 percent in Jan. 19, the highest since Dec. 16.

Hurt Credibility
“If the unhealthy situation continues for a long time, long-term interest rates will inevitably rise and hurt Japan’s global credibility,” Economic and Fiscal Policy Minister Yosano said on Jan. 14.
Kan pledged in June to balance the nation’s budget by fiscal 2020 as well as cap new bond issuances and spending for the next three years. He was able to meet that promise when compiling his fiscal 2011 budget in December by tapping into unused funds, most of which have been exhausted and cannot be relied on in future budgets.

“Our fiscal management policies were a promise we made to the world,” Finance Minister Yoshihiko Noda said in Tokyo today. “We need to do our utmost to avoid deviating from them.”
The primary deficit will be 23.2 trillion yen, or 4.2 percent of gross domestic product, in fiscal year 2020, the government said. A primary balance is achieved when revenue matches spending, excluding bond sales and interest payments.

Noda said the government’s spending goals will be subject to review in the middle of the year. He said the government isn’t planning to alter its goal to balance the budget by 2020.

Six-Month High
Costs to protect against a default by Japan reached a six- month high on Jan. 18, suggesting increasing concern about the ruling Democratic Party of Japan’s ability to control debt. Credit-default swaps, used to protect against nonpayment and speculate on changes in creditworthiness for five years, climbed to 86.49 basis points, higher than U.S. debt cost of 49.85 basis points.

“To reach a primary balance by 2020, we need reforms in both spending and revenue,” Yosano told reporters in Tokyo today. “We need to outline a comprehensive roadmap for tax reform -- corporate taxes, income taxes, inheritance taxes, sales taxes -- to address how we can boost revenue.”
The Cabinet Office estimate assumes nominal growth of around 1.5 percent over the next decade.
Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of GDP in 2012, the Organization for Economic Cooperation and Development estimates, the highest among group members. Today’s report, which uses different calculation methods, said debt will swell to twice the size of the economy in fiscal 2016.

Popularity Falls
Kan, whose approval rating halved since he took office in June, opens discussion about a record 92.4 trillion yen budget next week at parliament, where he lost ground in mid-term elections in July after he proposed increasing sales tax.

Japan in December forecast economic growth would slow to 1.5 percent in the year starting April 1 after expanding a projected 3.1 percent this year. In nominal terms, the economy will expand 1 percent, little changed from the estimated 1.1 percent, it said last month.
Recent economic data have shown signs for a recovery. Industrial production rose for the first time in six months in November and retail sales increased more than forecast. Today’s report estimates prices will stop falling next fiscal year.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net