October 15, 2009 / 2:41 AM / 9 years ago

UPDATE 5-Japan may need more bonds for record budget -Nikkei

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

* 10-year bond yields climb to 3-week high on budget woes

* Budget process a test of fiscal discipline for Democrats (Adds deputy prime minister’s quote in paragraph 9)

By Stanley White

TOKYO, Oct 15 (Reuters) - Japan’s new government could issue more bonds than it initially planned to fund its ambitious spending programmes as requests for next year’s budget swell to a record.

Yields on 10-year Japanese government bonds climbed to a three-week high on Thursday after the Nikkei business daily said budget requests from ministries and agencies for the 2010/11 fiscal year starting next April will reach an all-time high above 90 trillion yen ($1,008 billion). The government will make an official announcement on the budget on Friday.

Investors say yields could rise further due to worries that the Democratic Party-led government will be unable to rein in spending and will overwhelm markets with new debt.

Finance Minister Hirohisa Fujii has said he wants to limit bond issuance in 2010/11 below the 44 trillion yen earmarked for the current fiscal year.

This goal looks increasingly in doubt unless the government can find a way to trim requests after the deadline for their submission expires on Thursday.

Prime Minister Yukio Hatoyama, who is already struggling to fund his policies due to slumping tax revenues, signalled he would try not to add to already sky-high public debt.

Hatoyama told reporters the government could look into securing funds from special accounts, such as foreign exchange reserves.

“We think there is waste in particular in special accounts, so our aim is to achieve our goal of trimming (spending) as a whole,” Hatoyama told reporters.

Japan’s Deputy Prime Minister Naoto Kan, who is also national strategy minister, later told public broadcaster NHK that “government bond issuance to some extent may be inevitable” due to falling tax revenues.

Should the Democrats fumble the budget process it could damage the credibility of the largely untested party that voters swept to power in an historic election only two months ago.


“We’ve only just approached the start line, but I’m more worried today about bond issuance than I was yesterday,” said Nobuto Yamazaki, executive fund manager at DIAM Asset Management.

“I can’t rule out the chance that the Democrats can cut spending. But worries that they won’t succeed are helping yields rise today and are likely to continue to do so for the time being.”

Of the total expenditures, tax allocations to local governments are estimated at 17 trillion yen. Debt-servicing costs are seen at about 22 trillion yen, while general expenditures are expected to sharply exceed 50 trillion yen, the Nikkei business daily said, without citing any sources.

For a graphic tracking Japanese government spending, revenues and debt, click: r.reuters.com/bad88d

The record sum came despite Fujii’s request to cabinet members to keep their total requests below the 88.54 trillion yen in the initial 2009/10 budget, excluding funds necessary to meet election pledges by the Democratic Party.

The Democrats won a general election on Aug. 30, ending a half century of nearly unbroken rule by the Liberal Democratic Party (LDP), with promises to boost domestic demand by handing out child allowances, making high schools free and abolishing highway tolls.

However, several ministries are expected to seek outlays that the Democrats did not promise, the paper said.

Analysts have long said that drafting the 2010/11 budget would be a key test for the new government.

So far, individual cabinet ministers — lacking time and staff — appeared to have included requests for pet projects without sufficient cuts in other areas, according to Katsuhiko Nakamura, director of research at think tank Asian Forum Japan.

“They know what they want to do, but they have been unable to decide what to cut, so the overall total has grown,” he said.

“It’s easy to rejig the budget on an Excel spreadsheet, but when you really try to do it, it involves local governments such as prefectures and cities, towns and villages. They don’t seem to have had that in mind, or perhaps they knew it, but thought they could deal with it after the election.”

Falling tax revenues are complicating the situation.

The Nikkei said worsening corporate earnings might drag tax revenue for the current fiscal year to below 40 trillion yen, lower than the previous government’s initial estimate of 46 trillion yen. With tax receipts projected to remain sluggish in fiscal 2010/11, the government may have no choice but to issue more bonds, the paper said. (Additional reporting by Linda Sieg and Chisa Fujioka in Tokyo and Archana Shankar in Bangalore; Editing by Michael Watson and Joseph Radford)

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