Japan Planning Record Budget to Help Bolster Economy Hit by Recession

BY :MASAAKI IWAMOTO & KYOKO SHIMODOI

JANUARY 12, 2015

Japan's Prime Minister and leader of the ruling Liberal Democratic Party (LDP) Shinzo Abe was re-elected on Sunday. (Reuters Photo)

Japan plans a record budget for next fiscal year to support an economy that fell into recession after Prime Minister Shinzo Abe’s government increased the sales tax.

Government ministers and the ruling coalition parties approved the 96.34 trillion yen ($814 billion) budget proposal for the 12 months starting April 1 at a meeting in Tokyo, said Finance Minister Taro Aso.

Japan, fighting to rein in the world’s heaviest debt burden, will see tax revenue rise to the highest level in 24 years while new bond issuance declines to the lowest since 2008. Abe’s already boosted public works spending and support for small businesses through a supplementary budget for the current year.

“The budget will continue to grow each year as it gets increasingly difficult to curb social welfare spending due to Japan’s aging population,” said Kyohei Morita, chief Japan economist at Barclays.

“Given the risk that the economy will be hurt by a sudden decline in public works spending in the latter half of 2015, the government might have to draft another extra budget,” he added.

Tax revenue for next fiscal year is projected to rise to 54.53 trillion yen and cover 57 percent of the budget, up from 52 percent. New bond issuance will decline to 36.86 trillion yen, Aso said.

While the sales tax has increased, the government has made plans to reduce corporate taxes by 3.29 percentage points over two years.

Economic contraction

Gross domestic product contracted for two straight quarters after the sales tax was increased three percentage points to 8 percent in April.

In response, the Japanese government deferred yet another planned bump in the levy and in December assembled a 3.5 trillion yen stimulus package and the supplementary budget.

Real gross domestic product should rebound, growing 1.5 percent next fiscal year, according to estimates released by the Cabinet Office on Monday. That follows a projected 0.5 percent contraction in the 12 months through March. Abe’s Cabinet is scheduled to meet on Jan. 14 to formally adopt the budget. The government has yet to release a full breakdown of all planned expenditure.

“The budget deals appropriately with issues Japan faces, including the revitalization of regional economies and the improvement of social welfare,” said Aso.

“Coupled with tax revisions for the next year, the budget will revive the economy while consolidating government finances,” he added.

Debt to GDP

The government will meet its target for halving the ratio of the primary balance deficit to GDP next fiscal year, Aso said. This gauge is calculated by subtracting expenditures excluding interest payments from revenues without bond sales, and is a key measure for the Abe administration as it attempts to control debt.

In a fiscal reform plan released to the public in 2013, the government said it also aimed to achieve a surplus in the primary balance in 2020.

Japan’s debt-to-GDP ratio is projected by the International Monetary Fund to swell to more than 245 percent in 2015. Moody’s Investors Service cut Japan’s credit rating one level to A1 last month citing uncertainty over whether Japan could achieve its deficit reduction goals.

“It’s difficult for Abe to cut spending dramatically ahead of local elections,” said Takeshi Minami, an economist at Norinchukin Research Institute.

“The government seems to be conservative in the main budget. It just drafts extra budgets whenever it’s necessary to boost the economy.”

Bloomberg

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