TOKYO, July 20 (Reuters) – Japan’s government said it would stick to caps on spending and new bond issuance in the next fiscal year, although meeting the targets is expected to be tough given rising social welfare costs.
Credit agencies have warned of possible downgrades of Japan’s debt rating as the ruling party’s loss in an upper house election jeopardised efforts to rein in the country’s huge public debt.
Japan will keep new debt issuance from exceeding the current year’s level of 44.3 trillion yen ($511 billion), Chief Cabinet Secretary Yoshito Sengoku said after the government released a budget outline for fiscal 2011/12, starting next April.
The outline says the government will aim to cap general-account spending, which excludes debt servicing costs, at around 71 trillion yen in 2011/12 to rein in bulging debt.
Sengoku said the government hoped to formalise the guidelines by the end of July.
Based on the budget guidelines, government ministries will submit their spending requests by the end of August, and a draft annual budget is usually compiled by the end of the year.
Japan’s public debt — nearly twice the size of the $5 trillion economy — has long been financed domestically from the country’s massive pool of savings that mostly sits in the banking system and is recycled into JGBs.
But fears are growing that the ageing population will start drawing on that pool of savings, forcing Japan to rely on foreign investors to fund its debt and potentially creating market instability.
The spending and bond issuance caps were part of a fiscal framework the government agreed on last month to show investors it will take steps to improve public finances after Europe’s sovereign debt crisis pummelled financial markets.
But meeting them is easier said than done.
The government needs to come up with revenues to cover social welfare costs which, due to an ageing society, increases by roughly 1.3 trillion yen each year.
Some ruling party lawmakers are opposed to big cuts in spending in some areas, citing the damage it could do to the fragile economic recovery and the party’s popularity.
Prime Minister Naoto Kan has called on the need for fiscal reform but the big loss of his party in upper house elections earlier this month has reduced his clout in policymaking.
The ruling Democratic Party has a majority in the powerful lower house but will need the support of other parties in passing legislation through the upper house. That means Kan may need to compromise to advocates of big spending. (Additional reporting by Tetsushi Kajimoto; Editing by Edwina Gibbs)