The Japanese government will set incremental goals to reduce its heavy reliance on debt in its upcoming fiscal strategy, the Nikkei business daily reported on Tuesday, citing a draft of the plan.
Credit ratings agencies have threatened to downgrade Japan’s sovereign rating as the ambitious spending plans of the country’s new government, in power for six months, have fueled concerns that Japan’s debt burden will continue to grow.
Prime Minister Yukio Hatoyama’s approval ratings have tumbled and the government could face pressure to spend more to appeal to voters before an election expected in July.
Japan’s outstanding debts are already almost twice the size of its economy, and its debt-to-GDP ratio is the worst among industrialized nations, meaning the government has little leeway to boost spending further without raising taxes, which could push the economy back into recession.
The Democratic Party-led government plans to announce by June a budget framework for fiscal 2011 to fiscal 2013 as well as a plan for imposing fiscal discipline over the medium-to-long term, the Nikkei said.
The ultimate goal is a steady reduction in the ratio of government debt to gross domestic product, with intermediate steps of halving the primary balance deficit, reducing it to zero, and achieving a surplus. Dates have yet to be set for any of the targets, the report said.
A budget is in primary balance when spending equals revenues excluding debt servicing costs and income from bond sales.
But economists were doubtful whether simply promising to improve the primary balance would be enough to ensure investors that outstanding debts will fall over time.
“It’s the first step toward restoring Japan’s fiscal health,” said Satoru Ogasawara, an economist at Credit Suisse Securities in Tokyo.
“The focus would be on how to achieve such a target. The key question is whether the government will choose to cut spending or increase revenues. If it wants to increase revenues, that will obviously lead to debate about tax hikes.”
Japan’s outstanding debt-GDP ratio is larger than that of Greece, whose debt crisis has roiled global financial markets for months and thrown the spotlight on massive government debt levels. But Japanese officials and economists have stressed that Athen’s problem is different and Japan is unlikely to see a similar backlash from financial markets.
Data showed on Tuesday that Japan’s industrial output slipped for the first time in a year in February due to the Lunar New Year in Asia, although analysts expect solid exports to underpin a fragile economic recovery.
The jobless rate held steady and the availability of jobs improved in the same month, but a fall in household spending showed that the impact of strength in exports and output has been slow in filtering through to the rest of the economy.
Other fiscal discipline proposals include a “pay-as-you-go” rule — which would keep spending in line with tax revenues — and a fixed rate for shrinking budget deficits, the Nikkei said.
Japan’s primary budget deficit for fiscal 2009 is estimated at a record 40.6 trillion yen ($438.8 billion) when both central and local government debts are factored in.
Past governments had aimed to achieve a surplus by fiscal 2011, a target abandoned before the Democrats took power in 2009.
The draft budget framework offers a variety of proposals specifying spending levels, one of which would set bounds on how much each ministry and agency could request, the report said.
The parliament approved last week a record 92.3 trillion yen budget for the fiscal year starting on April 1 with a record 44.3 trillion yen of new bond issuance.
Japanese government bond futures took the details of the fiscal plan as a positive sign. June 10-year JGB futures edged up by 0.03 point to 138.17, pulling back from 4-½ month low of 138.11 touched the previous day.