Japan's record FY2018 budget puts fiscal discipline in doubt

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe’s cabinet endorsed a record $860 billion budget for fiscal 2018 on Friday, opting to keep the economy on a sustained recovery with aggressive monetary stimulus and putting fiscal reforms on the back burner again.

FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

The general-account budget spending for the next fiscal year starting April will total 97.7 trillion yen ($860 billion), the biggest amount ever and slightly more than this year’s initial plan to spend 97.5 trillion yen, the Ministry of Finance said.

The budget - a record high for the sixth year - got a boost from snowballing welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea. The demands strain the heaviest public debt burden in the industrialised world.

Failure to curb budget spending has cast doubt on Abe’s will to back fiscal reform. His administration is counting on growth to boost tax revenue and reduce new borrowing, and on the Bank of Japan’s (BOJ) low-rate policy to curb the high cost of servicing mammoth public debt.

“Abe’s fiscal reform relies heavily on economic recovery and optimistic tax revenue estimates,” said Masaki Kuwahara, senior economist at Nomura Securities. “I don’t see a strong determination to resolve public debt from this budget.”

Tax revenue for 2018/19 is estimated at 59.1 trillion yen, the highest since fiscal year 1991 during the asset bubble era, assuming the government’s rosy projections for real 1.8 percent and nominal 2.5 percent growth next fiscal year.

Hefty tax revenue allows for reductions in new bond issuance to 33.7 trillion yen, bringing the debt dependency ratio to 34.5 percent - way higher than other advanced peers.

The government will spend 23.3 trillion yen for debt-servicing - roughly a quarter of the overall budget - even as it keeps assumed interest rates at a record low of 1.1 percent due to the central bank’s negative rate policy.


Finance Minister Taro Aso said this budget should help revive the economy and achieve fiscal reform at the same time, with some spending focused on boosting productivity and investing in human capital.

While some economists say the budget won’t have much impact on near-term growth, others see the spending plan as unsustainable.

“There’s a risk the economy may decelerate in coming years, which is a source of concern as that would dent tax revenue,” said Takuya Hoshino, economist at Dai-ichi Life Research Institute.

On top of next year’s budget, Abe’s cabinet approved on Friday an extra budget for this fiscal year, with additional spending of 2.7 trillion yen and extra bond issuance of 1.2 trillion yen, underlining his expansionary fiscal stance.

To strengthen Japan’s fiscal structure, analysts urge Abe to streamline welfare spending. They call for a credible fiscal plan, as Abe has shelved the 2020/21 budget-balancing goal, with a pledge to create a social welfare system for all generations.

Social security spending, the budget’s biggest item, will rise 500 billion yen to a record 33 trillion yen next fiscal year, in line with the government’s mid-term fiscal plan to limit rises in welfare outlays to 500 billion yen a year.

“Without a credible fiscal plan, Japan will lose market confidence in the medium to long term,” said Hidenori Suezawa, financial market and fiscal analyst at SMBC Nikko Securities.

“It’s time to shift towards fiscal consolidation before the BOJ exits stimulus. Japan should be able to assure markets that it can manage debt without relying on the BOJ,” he said.

($1 = 113.5100 yen)

Editing by Jacqueline Wong