December 14, 2009 / 5:21 AM / 10 years ago

UPDATE 3-Japan coalition to curb bond issuance at Y44 trln

(For more stories on the Japanese economy, click [ID:nECONJP])

* Aims to keep 2010/11 new debt issuance below Y44 trln

* Govt to set out budget guidelines on Tuesday

* Govt notes market concerns over Japan finances (Adds draft of budget guideline)

By Tetsushi Kajimoto

TOKYO, Dec 14 (Reuters) - Japan’s coalition government agreed to keep bond issuance below about 44 trillion yen ($495 billion) next fiscal year, a day before the government sets out its guidelines for the year’s budget.

Japan is running the gauntlet of a sovereign ratings cut after Fitch Ratings said it might downgrade the country if it significantly exceeded its new issuance target. [ID:nT286946]

The bond issuance target will be a central pillar of the guidelines for compiling the budget for the year starting next April, and was agreed despite grumbling from a small coalition party that called for greater spending to support the economy.

“I want to try as much as possible to keep it within 44 trillion yen,” Prime Minister Yukio Hatoyama told reporters on Monday.

The news did little to ease the steepening pressure on the yield curve in Japanese government bond futures. [ID:nTOE5BD02U]

While the agreement will offer some relief to investors worried about a bond glut, the government will likely face the daunting task of either scaling back some of its policies or seeking additional sources of funding.

Analysts have said the 44 trillion yen target may be tough to meet given a plunge in tax revenues as a result of the worst recession in decades.

In a draft of the budget guidelines, to be formally approved by the cabinet on Tuesday, the government said it would try to maximise use of non-tax revenue, such as reserves from special accounts, without elaborating.

In recent years, Japanese governments have tapped reserves in a number of special accounts. Critics say these special accounts are opaque and hold large amounts of unused funds.

The People’s New Party, a small coalition partner, has been calling for greater spending by tapping such funds, criticising the government as focusing too much on fiscal discipline and neglecting people’s livelihoods.

Hatoyama last week agreed to increase the size of stimulus measures to 7.2 trillion yen to placate the People’s New Party, although the government had originally been considering spending of about 2.7 trillion yen.

The policy guidelines will also map out a path towards fiscal reconstruction, including fiscal management plans such as a midterm framework with compilation of multi-year budgets in mind, the draft also said. [ID:nTKU105754]

The government will work to reduce structural fiscal deficits and stably cut the ratio of outstanding public debt to gross domestic product (GDP), it said in the draft, adding that there are concerns in the market over Japan’s finances.

The government wants to limit bond issuance as Japan’s ballooning public debt is projected to hit 200 percent of GDP in 2010/11, by far the highest among major developed countries. [ID:nT147988] (Additional reporting by Hideyuki Sano, Sumio Ito; Editing by Jan Dahinten and Hugh Lawson) ($1=88.82 Yen)

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