TOKYO Dec 24 Japan's government approved
a 90.3 trillion yen ($1.16 trillion) draft budget for the year
from next April that resorted to "special" bonds and accounts to
achieve its targets, underscoring its struggle to impose fiscal
discipline while paying for post-quake reconstruction and
swelling welfare costs.
The government will issue special-purpose bonds, to be
repaid by future tax rises and thus not counting as new
issuance, to meet a self-imposed cap on new borrowing.
Although Japan's public debt is already twice the size of
the $5 trillion economy, the government has had little success
in restraining spending, due to the rising costs of caring for a
rapidly ageing society.
It also has yet to achieve a consensus on much needed tax
hikes in a split parliament.
Following are details of key budget items for 2012/13 and
how the government proposes to fund them.
RECONSTRUCTION: 3.3 TRLN YEN
The government plans to spend 3.3 trillion yen on rebuilding
northeast coastal regions devastated by the March 11 earthquake
and tsunami. That amount will be set aside in a special account,
excluded from the general account budget, allowing the
government to achieve a cut in general spending for the first
time in six years.
The reconstruction spending comes on top of nearly 15
trillion yen the government allocated in three emergency budgets
in the current year, making it likely the government will end up
exceeding its target of 19 trillion yen in reconstruction
spending over five years.
The extra budgets are forecast to boost gross domestic
product (GDP) by a cumulative 2.6 percent, providing the basis
for the government's projection of 2.2 percent growth in the
world's third-largest economy in 2012/13.
The government will issue reconstruction bonds, a type of
special-purpose bond that does not count as new issuance, to
fund the spending. They are to be repaid over 25 years through
increases in the income tax and corporate tax.
SOCIAL SECURITY SPENDING: 26.4 TRLN YEN
The government plans to spend 26.4 trillion yen on welfare,
down 8.1 percent from this year but accounting for 30 percent of
The government is issuing special-purpose bonds
worth 2.6 trillion yen to meet the state's 50 percent
contribution to pension payments, which will therefore be
excluded from the general account.
Otherwise, social security spending remains on an uptrend
and is expected to rise at a rate of 1 trillion yen annually in
Although the bonds are designed to be repaid by future tax
hikes, the government is having difficulty getting lawmakers to
commit to supporting an unpopular plan to double the 5 percent
sales tax by mid-decade.
PUBLIC WORKS: 4.6 TRLN YEN
The government plans to cut spending on bridges, roads and
infrastructure by 8.1 percent in the general account, although
such spending actually increases by 6.6 percent if the special
account for reconstruction is included.
That spending is still only one-third of the peak of 15
trillion yen hit in the late 1990s due to a shift away from
reliance on large-scale public works to spur economic growth.
The government plans to double to 4 trillion yen its credit
guarantees for a newly established public entity that is helping
Tokyo Electric Power Co compensate those affected by
the nuclear crisis at the Fukushima Daiichi nuclear plant.
The state-backed Nuclear Damage Liability Facilitation Fund
can also ask the government to issue special-purpose bonds worth
up to 5 trillion yen for additional funding.
FOREX INTERVENTION WAR CHEST
The government has expanded its war chest for currency
market intervention twice this fiscal year, by a total of 45
trillion yen, after spending 13.6 trillion yen on intervention
during the year to combat the yen's rise to record highs.
The borrowing limit for currency intervention in the foreign
exchange special account now stands at 195 trillion yen. The
authorities had used 127 trillion yen as of the end of November,
leaving 68 trillion yen still available.
The government technically kept new borrowing at 44 trillion
yen and trimmed general sending to 68 trilion yen from this
year's 71 trillion yen.
Reliance on debt hit a record high of 49 percent while tax
revenues are seen falling short of new bond issuance for a
fourth straight year. The ratio would be even higher if
special bonds were included.
Outstanding debt is projected to reach
937 trillion yen including local government debt at the end of
March 2013, or 195 percent of GDP, compared with 192 percent
expected at end-March 2012, with the borrowing limit only
helping to slow the pace of the increase in debt. The debt-GDP
ratio as calculated by the OECD is higher at 219.1 percent in
2012, the worst among industrialised countries.
Despite low borrowing rates, the bulging debt has pushed up
debt-servicing costs to 22 trillion yen, accounting
for one-quarter of the general-account budget, squeezing out
The primary budget deficit, which excludes debt
servicing, is 22.3 trillion yen, little changed from the current
year's initial budget.
The government aims to bring the primary balance into the
black by 2020/21, an achievement unseen in Japan for two
decades. This will only be attainable with substantial spending
cuts and tax hikes.
Tax revenues are seen rising to 42.3 trillion yen but there
is no change in the general downtrend in Japan's tax-to-GDP
ratio, which has fallen to 17 percent, the lowest among
Moody's Investors Service, Standard and Poor's and Fitch all
rate Japan's sovereign debt at AA minus. Moody's cut its rating
in August of this year while S&P and Fitch lowered their outlook
to negative months after the March disaster.
Japanese rating agency Rating and Investment Information Inc
stripped Japan of its AAA rating on Dec. 21, the first rating
downgrade by a domestic agency.