Japan Brief/FPCJ, No. 0932
June 15, 2009


New Fiscal Restructuring Goals Proposed

The Japanese government has presented to the Council on Economic and Fiscal Policy, a high-level economic policymaking body, a draft proposal of the Basic Policy for economic and fiscal management—the so-called big-boned policy—for fiscal 2009, which included its new goals for restoring health to the nation’s debt-laden public finances in the face of plunging economic growth. The proposal is expected to be finalized later in June.

The proposal crafted by the Cabinet Office calls for a gradual lowering of the ratio of public debts to GDP, starting in the early 2020s after steadying it in the mid-2010s. The ratio stands at 170 percent, by far the highest among the major economies. As a precondition for embarking on this long-term fiscal rebuilding, the proposal foresees achieving equilibrium in the primary balance in the annual budget—the difference between expenditures excluding debt-servicing costs and revenues exclusive of those from bond issues—within 10 years, that is, by fiscal 2019.

These targets represent a major setback from the goals that were in place before the global economic crisis broke out causing a devastating impact on the Japanese economy. Originally, the government was aiming to achieve primary-balance equilibrium by fiscal 2011. But the sharp downturn of the economy is leading to diminished tax revenues and the need for a series of massive fiscal pump-priming measures. Soon after he took office in September 2008, Prime Minister Taro Aso declared that “economic realities” were forcing him to move back the target by several years. This in turn means a delay in embarking on a real mandate to tackle the gargantuan public debts, a long-term threat to the viability of the Japanese economy. Public debts, national and local combined, total 816 trillion yen, nearly 170 percent of GDP, which compares with 60-80 percent in other major economies.

As things stand now, even the new goals are viewed as by no means easy to achieve. Cutbacks in budgetary expenditures face strong political resistance in the midst of the deep recession coupled with an approaching general election. A raising of the consumption tax, from the current 5 percent to possibly 10 or 12 percent, which Prime Minister Aso himself considers to be an inevitability in the years ahead, is hardly a political possibility that can be written down in a long-term fiscal policy program at the moment. Finance and Economy Minister Kaoru Yosano, nonetheless, told the press after the meeting of the Council on Economic and Fiscal Policy, “We are not avoiding honestly asking the nation for tax reforms [that include a consumption tax hike]” (Asahi Shimbun, June 9).

Newspaper Editorials: Discipline and Greater Frankness Sought

All in all, Japan’s fiscal future remains uncertain, as the government emphasizes that the first important thing for the time being is to turn the economy around and prevent a further increase in unemployment. There are also mounting calls for structurally tailored longer-term policies aimed at strengthening the nation’s growth power, thereby creating more jobs and security in people’s lives. These calls in turn caused increasing criticism that the upcoming Basic Policy for economic and fiscal management for fiscal 2009 is not addressing these issues properly.

This is one of the points on which domestic media commentaries focused. They also called for stricter discipline in spending, including the seemingly unstoppable swelling of social security costs, and greater frankness in convincing people of the eventual need to raise the consumption tax.

The Yomiuri Shimbun (June 14), for example, argued, “Although these are estimates, in the face of such a stern reality, neither the ruling nor the opposition parties can afford to put off any longer discussing the issue of raising the consumption tax rate. Under such critical national fiscal conditions, the government has no choice but to require the public to shoulder heavier burdens in the future.... If this situation is left unresolved, it could cause a plunge in government bond prices and rising interest rates, shaking the foundations of the economy. It is a matter of course for the government to propose a new target for fiscal rehabilitation and work toward realizing it.”

The Asahi Shimbun (June 10) argued, “Japan, it should not be forgotten, has the worst financial deficit of any major industrialized country. Some fret that allowing the deficit to continue ballooning would cause a crash in government bond prices and a swift rise in long-term interest rates, causing the economy to stagnate. Consistently saddling future generations with debt, meanwhile, will seriously undermine the level of social security and other public services received by our children and grandchildren compared with the benefits being offered today. New targets are needed to turn this tide of red ink.”

Calling for a remaking of the expenditure structure of the national budget, the Mainichi Shimbun (June 10) in the same tone said, “The first thing that must be carried out is a fundamental review of expenditures,” parting with the past practice of “across-the- board cuts” in favor of greater prioritization. “Next is a strengthening of social security functions and securing of financial resources to support it.” It asked, “What do the ruling parties intend to do to ensure stable resources for social security?”

The Nikkei (June 10) expressed concern about “the loss of confidence in fiscal credibility on the part of the market resulting in a steep rise in long-term interest rates in the absence of solid fiscal discipline,” saying that “new goals are needed.” The newspaper also stressed the importance of structural reform and deregulation “aimed at continuous growth of the Japanese economy.” It said critically, “The draft report of the ‘big-boned policy’ devoted only half a page to deregulation.”

Discipline in spending was the Sankei Shimbun’s point of argument, too (June 10). It wrote, “The problem is how to achieve it [discipline]. The report emphasizes the implementation of the ‘midterm program’ with a scenario of tax overhaul, including that of the consumption tax, which may be started in fiscal 2011, but this is facing a strong challenge in the ruling parties in view of the approaching general election. The Aso government is required to do its best to defend this program of its own making and deliver on it.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


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