June 14 (Reuters) – Japan’s new Prime Minister Naoto Kan has vowed to tackle the country’s huge public debt, but his commitment to fiscal austerity could be tested with the economic recovery still fragile.

Bonds

Kan, in his first policy speech, warned that the country risked defaulting on its borrowing if it failed to rein in its massive public debt. [ID:nLDE65A052]

He has spoken in favour of fiscal discipline and during his five-month stint as finance minister pledged to cap new bond issuance for the fiscal year from next April at the record 44.3 trillion yen ($483 billion) set for the current fiscal year’s budget.

Following are key quotes from Kan and his ministers:

KAN

June 11, in first policy speech in parliament:

“We cannot sustain public finance that overly relies on issuing bonds.

“As we can see in the euro zone confusion that started from Greece, there is a risk of default if the growing public debt is neglected and if trust is lost in the bond market.”

June 8, in news conference:

“Having weak finances means we can’t make bold moves. Restoring our fiscal health is indispensable for economic growth.

“If we keep up the current pace of spending for the next three to four years, the ratio of public debt to GDP will go up to over 200 percent in a few years.

“In that sense, this problem is the biggest issue this country must tackle … We need bipartisan debate now on what really needs to be done to restore finances, in terms of the extent and time.

“If we just raise taxes to pay back debt, then this would accelerate deflation. Spending must be allocated to areas that lead to economic growth.

“The reason why Japan’s finances have worsened this much, simply put, is that over the past 20 years, because we couldn’t raise taxes, we tried to make up for this by borrowing.”

May 17, in parliament:

“Limiting bond issuance doesn’t mean I am saying we will shrink fiscal spending …

“Japan is in deflation, so we need a certain amount of fiscal spending to keep money circulating.” [ID:nTOE64G063]

May 11, in news conference:

“Markets are becoming sensitive to sovereign risk, so in order to prevent this from happening we need to make as much effort as possible so that (new government bond) issuance does not exceed 44.3 trillion yen.”

May 3, in news conference:

“We have been making efforts to draw up a fiscal reform bill by the end of April but further coordination is needed. I have been told by the prime minister to proceed carefully on the matter.”

FINANCE MINISTER YOSHIHIKO NODA

June 12, in television programme:

“It’s a very severe situation,” Noda said, referring to the country’s public debt that is nearly twice the size of its GDP.

Noda said the government would consider which of the spending plans pledged earlier by the Democratic Party to prioritise.

“We can’t change everything (pledged by the party) all of a sudden. But we’ll do it steadily.”

June 9, in interview:

“Long-term interest rates remain stable at low levels at the moment … but we cannot be content with this forever. We must conduct debt management with a sense of crisis while communicating with markets to have JGBs smoothly absorbed …

He pledged that Japan will report its fiscal reform plans to the June 26-27 meetings of Group of 20 leaders in Toronto so as to win international trust in its efforts to fix its debt woes.

“Our debt stock stands at the worst levels in the world, so we must show a time frame in reducing the debt pile and win an evaluation that Japan takes heed of the need for fiscal discipline.”

June 8, in news conference on assuming the post:

“Prime Minister Kan has recently said he wants to keep government bond issuance under 44.3 trillion yen and I would like to make the utmost efforts in that direction.”

May 17, in news conference:

“I think the Japanese people understand well the dangers of losing fiscal discipline when they look at news about Greece’s crisis. It is important to show a path to fiscal reform with the mid-term fiscal framework and secure the funding to implement our campaign pledges.

“This is not just what the markets or the Ministry of Finance want, this is also basically what the Japanese people want.

“Up until now, our rule has been that we can’t enact a policy if we don’t have the funding. Basically, I want to continue with this approach. In that regard, Kan’s target of 44.3 trillion yen is an appropriate figure.”

April 5, in news conference:

Asked if the government needed to compile an extra budget:

“The economy is steadily recovering. The government’s role is to monitor the economic situation and respond flexibly when needed. In terms of sequencing, the government would use budget reserves first.”

NATIONAL STRATEGY MINISTER SATOSHI ARAI

June 11, in news conference:

“We want to complete the growth strategy and the medium-term fiscal framework sometime June 18-22, as the fiscal framework will become the basis for discussions at the G20 summit …

“We’re still working on the framework so I cannot say much but I think it should be created based on the pay-as-you-go rule (which would keep spending in line with tax revenues) and the promise to limit bond issuance for next fiscal year at 44.3 trillion yen.”

June 8, at news conference after assuming the post:

Arai said he intends to compile the medium-term fiscal framework and long-term fiscal management strategy by June 24 before Kan leaves for the Toronto G20 summit.

“It would be difficult to show specific tax reform plans in the fiscal framework.” (Reporting by Rie Ishiguro and Leika Kihara; Editing by Chris Gallagher)