Japan Introduces First Reconstruction Budget

by Mary Swire, Tax-News.com, Hong Kong

25 April 2011

The Japanese government has announced its first supplementary 2011 budget through which it plans to take care of the country’s initial reconstruction and rehabilitation efforts after last month’s earthquake and tsunami.

As promised, the interim budget will provide funds for reconstruction amounting to some JPY4 trillion (USD48.8bn). It is expected to be presented to parliament on April 28, with approval in the beginning of next month.

Such approval will need the support of the opposition parties in the parliamentary upper house. While such support has not been forthcoming recently with Japanese Prime Minister Naoto Kan’s public approval rating falling, it will probably be available for these emergency measures, particularly as the interim budget does not contain any politically contentious proposals.

Some of the funds for the interim budget will be obtained by raiding the government’s emergency reserves, but the bulk of the money will come from taking JPY2.5bn from pension fund reserves, and jettisoning the planned increase in child allowances and cancellation of road tolls.

In particular, given the size of Japan’s public debt, the financial markets are pleased that the government has not, this time, announced any new bond issuance, but there is also no disclosure of official thinking on what form a reconstruction tax could eventually take.

The total damage caused by the disaster has been estimated at some JPY25 trillion, and one or two larger supplementary budgets will still be required later this year. It is widely expected that those budgets will need to be financed by a mixture of government bond issuance and additional taxation. In recent days, there has been much talk of an increase to the country’s consumption tax to provide the bulk of the necessary funds.

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