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January 27, 2013 9:59 am
Japan plans to cut its reliance on government bonds, as prime minister Shinzo Abe tries to demonstrate determination to repair the state’s stretched finances.
The Liberal Democratic party at the weekend unveiled a draft budget that for the first time in four years will raise more money through taxes than bond sales.
The budget for fiscal 2013 – which ends in March 2014 – forecasts tax revenues of Y43.1tn ($474bn) compared to bond proceeds of Y42.9tn.
Under the Democratic party, which was ousted by the LDP in elections in December, Japan had relied more on debt than taxes to fund spending, causing the country’s gross borrowings to swell to more than twice the size of the economy.
Since coming to power, the LDP has faced opposition from the Bank of Japan and the finance ministry over its aggressive growth strategy, which relies on monetary and fiscal stimulus to banish the persistent state of deflation in the world’s third-largest economy. The powerful finance ministry has been keen to allay market fears over a rise in long-term interest rates triggered by extra supplies of bonds.
Mr Abe’s supplementary budget for fiscal 2012, which was approved this month, gave rise to such worries as it included an additional Y5.2tn in bonds, smashing through the Y44tn ceiling that the DPJ had adopted as part of a 2010 plan to contain the country’s spiralling debts.
The BoJ is also likely to welcome Mr Abe’s restraint. Under governor Masaaki Shirakawa, the bank has sought to find ways to spur growth in Japan, but not if that means bankrolling a profligate government by buying ever-rising amounts of its debt.
While the central bank last week caved in to Mr Abe’s demands for a higher inflation target, it also extracted a commitment from the government to promote measures to create a “sustainable fiscal structure with a view to ensuring the credibility of fiscal management”.
The government says it will draw up a long-term plan for fiscal consolidation this summer, as it presents strategies to restore the country’s competitiveness. The centrepiece of that plan is lifting the country’s rate of consumption tax from 5 to 10 per cent, beginning in April 2014.
In a speech at the World Economic Forum in Davos on Saturday, Akira Amari, the economy minister, said the government was wedded to the commitment the DPJ made to the Group of 20 nations in 2010, under which Japan would aim to return to a primary balance surplus by March 2021.
A surplus in the primary balance means a government can finance its spending, except for debt-servicing costs, without issuing new bonds.
According to OECD data, Japan’s primary balance deficit stood at 7.9 per cent of potential gross domestic product last year, which was 50 per cent wider than any other major economy.
In compiling the budget, the new government “probably wants to give the impression of maintaining some degree of fiscal discipline”, said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
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