Japan Brief/FPCJ, No. 0978
December 28, 2009


Government Puts Together Largest Ever Budget for FY 2010

At the December 25 cabinet meeting, the government decided on the fiscal 2010 budget bill amounting to 92.3 trillion yen, the largest ever. The draft budget carries with it a debt issue of more than 44.3 trillion yen, also a record. The size of the budget, the first crucial test for the government of the Democratic Party of Japan, which took office 100 days earlier, highlights its policy of giving priority to the improvement of the people’s lives, but it has also deepened concern over a fiscal crisis that is the worst among the major economies and is still deteriorating. The budget bill is set to be submitted to the National Diet when it reconvenes in January and is expected to be passed by the time the new fiscal year starts on April 1.

The fiscal 2010 draft budget swelled from its counterpart for the current fiscal year (88.5 trillion yen, which already was a record) in reflection of such programs as the child allowance, free senior high school education, cash subsidies to farmers, and higher payment of medical fees to medical institutions intended to alleviate the shortage of medical doctors. Particularly noteworthy is the sharp 9.8% rise in social security costs, which account for 51% of the general expenditures at 53.5 trillion yen (excluding debt-servicing costs at 20.6 trillion yen). This is the first time that the proportion of social security costs has exceeded 50%. In marked contrast, public works investment, which has been cut back by more than 18.3%, amounts to 5.8 trillion yen.

At a news conference following the decision on the draft budget, Prime Minister Yukio Hatoyama described it as “a budget meant to safeguard the life of the people.” He also claimed that three reforms were incorporated in the architecture of the budget: first, the principle of a shift of priority “from concrete to people”; second, initiatives taken by politicians instead of bureaucrats; and third, securing transparency in the budget formulation process.

Some creditable aspects notwithstanding, the budget bill appears to be overshadowed, as media reports made clear, by concern over a severe revenue shortage and its implications for the future of Japan’s public finances, which are already debt-laden to a perilous extent. A major reason for the squeeze is a plunge in prospective tax revenues due to the economic downturn and the drop in corporate profits. Tax revenues for fiscal 2010 are estimated to fall to 37.4 trillion yen, the same level as 26 years ago, in the mid-1980s. Corporate tax revenues are expected to be half the amount of normal years.

Thus, the budget bill includes another record 44.3 trillion yen government bond issue, up 11 trillion yen from approximately 33 trillion yen for the current fiscal year. This leaves the treasury dependent on debt for 48.0% of the total budget, up 10.4 percentage points. At the end of the fiscal year, on March 31, 2011, the outstanding balance of government bond issues will have zoomed to 637 trillion yen, the equivalent of 134% of Japan’s GDP. When debts attributable to local governments are combined, public debts will reach 862 trillion yen, or 181% of GDP.

Even a debt issue of this proportion is not enough to cover the budget deficit. The government also has to draw on funds preserved in various special accounts to meet possible fund shortages in such accounts. Such non-tax revenue adds up to some 10.6 trillion yen.

Under such circumstances, an urgent task for the government is to work out a mid- and long-term plan to pare down public debts that is backed up with a longer-range strategy to upgrade Japan’s economic growth and boost tax revenues, while working harder to cut back on expenditures.

In its official economic outlook for fiscal 2010 announced together with the budget bill, the government anticipates a real GDP growth of 1.4% and a nominal growth of 0.4%, implying a deflation of 1%. Counting on a likely recovery of the world economy, centering on China, and stronger domestic consumption thanks to stimulus measures, it anticipates that personal consumption will rise for two consecutive years. Housing investment and business capital investment are also projected to increase after years of slump. With regard to the timing of the start of a sustainable business recovery, Deputy Prime Minister Naoto Kan, concurrently in charge of economic and fiscal policy, said, “I hope it will come after the midyear” (Asahi Shimbun, December 26).

Editorials of Major Newspapers

Major newspapers’ assessment on December 26 of the Hatoyama government’s first budget bill were mixed—some unyieldingly critical—with others giving it some credit. But what was common in their commentaries was a concern over the seemingly non-stop loss of fiscal discipline.

The Sankei Shimbun, which has been critical of the Hatoyama government as a whole, asserted in its editorial, “The incumbent government, which has written off a consumption tax hike without writing a growth strategy, is headed to nowhere but fiscal bankruptcy if it continues to allow expenditures to swell in order to deliver on its election promises. The Hatoyama government must recognize that this is the greatest concern of the people.” In a similar tone, the Yomiuri Shimbun editorial said, “The Hatoyama Cabinet should start preparations so discussions for raising the consumption tax rate can begin after the upper house election next summer, and then the measure could be implemented as soon as the economy gets on a solid recovery track.” The title of the editorial (original Japanese-language version) was “Public finances are unsustainable if campaign pledges take precedence.”

The Nikkei editorial also largely discredited the budget. The business daily complained, “It does not show a path to mid- to long-term fiscal stabilization by way of ensuring growth of the Japanese economy.” It went on, “It is hard to say that the budget has a substance that provides strong support for economic growth. Most responsible for the failure is its inclination toward a ‘handing out’ policy for households,” ignoring the need to strengthen the corporate sector.

The Mainichi Shimbun editorial was rather more lenient toward the government, saying, “We should give credit to the government’s posture of ambitiously trying to deliver on the major policies in its campaign promises from its first fiscal year.” It continued, “It has taken only about 100 days since the birth of the administration to compile the budget bill, and this can be said to be a definite result.” The Mainichi summarized the budget bill as “having scored points that narrowly pass muster,” albeit a precarious acceptance. The Asahi Shimbun editorial struck a surprisingly similar note, saying, “Even so, [confusions and chaos in the budget formulation process notwithstanding] the administration managed to craft a budget within 100 or so days since it took office. The diligence shown by the administration in drawing up the spending blueprint deserves a pass mark.”

(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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