Japan’s 2012 budget makes grim reading

Even by current grim international fiscal standards, Japan’s budget for the year from April 1 makes scary reading.

For the fourth year in a row, government revenue from bond issuance is set to exceed that from all taxes. Outstanding government debt is expected to hit an extraordinary Y937tn.

The government has managed to hold general spending plans down to Y90tn – slightly below the level initially budgeted for in the current fiscal year – but only by carving out a special Y3.8tn account for disaster reconstruction and writing Y2.6tn in IOUs for the public pension funds.

That does not mean fiscal meltdown is imminent in the world’s third-largest economy. Unlike victims of Europe’s sovereign fiscal crisis, Japan can still comfortably fund its state debt from huge domestic savings. The yield on Japanese 10-year government bonds was a meagre 0.995 per cent on Wednesday.

But the 2012 budget could have important implications for long-term confidence in Japan’s ability to restore fiscal sustainability and, more immediately, for the credibility of the four-month-old administration of Yoshihiko Noda, prime minister.

Critics have seized on Mr Noda’s approval of old-fashioned public works projects including new high-speed Shinkansen rail lines and the resumption of a controversial dam project that his ruling Democratic party once promised to kill.

Claims of budgetary moderation have been dented by the decision to make the F-35 Lightning II Japan’s new air defence fighter, even though analysts say it is by far the most expensive of the three aircraft considered.

And the unusual handling of pension funding and reconstruction for areas swept by the huge earthquake and tsunami that hit the north-east on March 11 has left Mr Noda open to accusations he is papering over Japan’s budgetary cracks.

Officials were adopting “every accounting trick in the book”, complained the Asahi Shimbun, a left-leaning daily, in an editorial. “The Japanese government’s utter lack of urgency is appalling in light of the unfolding European debt crisis.”

Others have been less polite. For Japanese politics blogger Michael Cucek, the F-35, dam-building and embrace of another debt-rich budget showed Mr Noda was caving in to every ministerial spending wish – and that the prime minister was “not a flexible dealmaker, but a shambling, dissembling sea slug”.

Such barbs might have less bite if Mr Noda – a former finance minister who is known as a relative fiscal conservative – was making clearer progress in his efforts to raise the government’s tax take, which declined as a proportion of gross domestic product from 21 per cent in 1991 to 17 per cent in 2008.

But Mr Noda’s favoured tool, a doubling of the 5 per cent consumption tax around the middle of this decade, faces fierce political opposition.

Many ruling party members see such a raise as a betrayal of promises made before it won power in 2009 and a recipe for future electoral disaster. Nine DPJ Diet members announced this week they would quit the party over the issue and other disputes.

The signs of renewed divisions within the DPJ are fuelling calls from opposition parties for an early election – and reducing the possibility that any consumption tax increase bill will make it through the Diet’s upper chamber, where the ruling party lacks a majority.

Meanwhile, Mr Noda’s administration has been suffering the kind of slide in opinion poll ratings that has helped drive Japan’s prime ministerial carousel in recent years.

Further feuding over the budget and Mr Noda’s falling popularity will add to the difficulty of winning passage for the tax rise, said Kiichi Murashima, analyst at Citigroup Global Markets, in a research note this week. “The fiscal 2012 draft budget [has] exposed the Noda administration’s limits,” Mr Murashima said.