Japan fiscal targets need review: PM candidate's aide

TOKYO (Reuters) - Japan needs fiscal reform targets to tackle its massive debt but existing goals heavily influenced by bureaucrats should be reviewed, said an aide to the ruling party powerbroker challenging Prime Minister Naoto Kan.

A combination picture shows Japan's Prime Minister Naoto Kan (L) and Japan's ruling Democratic Party former secretary general Ichiro Ozawa speaking during a political debate ahead of the party leadership election at the Japan National Press Club in Tokyo September 2, 2010. REUTERS/Yuriko Nakao

Party heavyweight Ichiro Ozawa, challenging Kan in a party leadership election on September 14, has promised to put politicians, not bureaucrats, in charge of policies, but has also prompted worries about expanding Japan’s already huge debt.

Kan, in contrast, has built an image as a fiscal reformer since he took over in June as Japan’s fifth prime minister in three years, calling for debating a future increase in the 5 percent sales tax.

Lower house lawmaker Banri Kaieda, member of a group advising Ozawa on policies, said Ozawa was also serious about fiscal discipline, but said targets compiled under Kan should be reviewed if Ozawa became leader.

“I don’t think Mr. Ozawa is turning away from fiscal reform,” Kaieda, chair of the lower house committee on financial affairs, told Reuters on Monday in an interview, in which he also said the Bank of Japan could do more to fight deflation.

“Reform is needed, but it’s not right to have a reform plan that is under the mind control of the Ministry of Finance, so we would review the existing fiscal targets.

Japan in June set a goal of bringing its primary budget balance -- which excludes revenue from bond sales and debt servicing costs -- into the black within a decade. Its public debt is twice the size of the nearly $5 trillion economy.

The benchmark 10-year Japanese government bond (JGB) yield, which hit a 7-year low below 0.9 percent last month, has jumped more than 20 basis points since Ozawa formally announced he will run for the leadership race.

Kaieda said Ozawa was trailing Kan “6 to 4.” Although Ozawa heads the biggest DPJ group, his scandal-tainted image puts off the public and could affect the vote, in which party members of parliament, local lawmakers and party supporters will take part.

The winner is likely to be prime minister by virtue of the party’s majority in the powerful lower house. Nearly two-thirds of Japanese voters prefer Kan to Ozawa as premier, media polls showed on Monday.


Both camps have vowed to be proactive on fighting deflation and the yen’s rise to support the economy, but efforts have been constrained by the huge public debt. Kaieda said the Bank of Japan’s remaining policy options were also limited.

“It is not enough,” he said, when asked if the BOJ was taking sufficient action against deflation.

“But it’s clear that this issue will not be resolved with just the BOJ’s policies alone.”

Bowing to government pressure, the BOJ eased policy last week by expanding a cheap loan scheme, but the move did little to deter yen gains or falls in stock prices as investors saw it as a symbolic gesture that had barely any effect in supporting growth.

Kaieda said one possibility was for the central bank to buy more government bonds and that it was worth debating whether to change the BOJ’s self-imposed rule of limiting the cumulative amount of JGBs it holds to that of banknotes in circulation.

The government should also do its part to support growth through measures such as tax reforms, said Kaieda, a former economics commentator. Corporate taxes should be cut to prevent Japanese companies from shifting overseas, although it would be hard to implement the cut from the next fiscal year from April.

With rises in the yen also threatening Japan’s fragile economic recovery, Kaieda said the government should be ready to intervene in the currency market, where the yen is not far from a 15-year high against the dollar marked late last month.

It is possible for Japan to intervene alone, he said, despite concern that action without the help of U.S. or European authorities would have little impact.

“We know that the effect would be limited but solo intervention should not be ruled out,” he said.

Additional reporting by Yuko Yoshikawa; Editing by david Fox