On March 13, 2009, pedestrians walked past the Ministry of Finance Building in Tokyo.
Three feeders | Reuters
Japan’s government will prepare a record $735 billion budget for the fiscal year starting in April due to rising social security and debt-servicing costs, a draft seen by Reuters showed, adding to the industrial world’s heaviest debt.
A 115.5 trillion yen budget draft is being prepared as the Bank of Japan abandons its decade-long stimulus program, placing more burden on the government to stimulate the economy.
However, the draft shows that in order to improve public finances, the government plans to cut new bond issuance in the next fiscal year to 28.6 trillion yen from the 35.4 trillion yen initially planned for this fiscal year, helped by growing tax revenue.
The size of newly issued bonds fell below 30 trillion yen for the first time in 17 years.
Decades of fitful fiscal spending and reforms have left Japan with the heaviest public debt burden in the industrial world – more than twice the size of its annual economic output.
The Bank of Japan’s withdrawal from a decade of aggressive stimulus has increased pressure on Japan’s fiscal health as the government can no longer count on the central bank to effectively fund debt.
The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. Governor Kazuo Ueda signaled on Wednesday that the next rate hike was imminent, saying wage and price developments suggested the economy would be closer to sustainably achieving the central bank’s 2% inflation target next year.
The draft budget, which is higher than the current fiscal year’s 112.6 trillion yen, is expected to be approved by Prime Minister Shigeru Ishiba’s cabinet on Friday and submitted to parliament for review early next year.
According to the draft, tax revenue is expected to rise by 8.8 trillion yen from a preliminary estimate this year to a record 78.4 trillion yen, partly due to a recovery in corporate profits.
The primary budget balance (excluding new bond sales and debt service costs) deficit will be below 1 trillion yen, maintaining the possibility of the government achieving the primary budget surplus target in the next fiscal year.
The draft budget assumes the benchmark 10-year Treasury yield rises from 1.9% this year to 2% next fiscal year, exceeding 2% for the first time in 13 years.
This will increase debt servicing costs in interest payments and debt repayments this fiscal year from 27 trillion yen to 28.2 trillion yen.
As China’s economic slowdown puts pressure on exports, the government revised its economic outlook on Wednesday, predicting actual economic growth of 0.4% this fiscal year, down from the 0.7% forecast in November.
Growth forecast for the next fiscal year remains unchanged at 1.2%.
