Japan Under Pressure To Consolidate Finances

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

28 January 2010

Standard & Poor’s (S&P's) cut to Japan’s debt rating outlook piles more pressure on Prime Minister Yukio Hatoyama to embark on fiscal consolidation sooner rather than later, although he was elected only last September on a promise to put money back into the people's pockets. S&P downgraded the outlook to "negative" from "stable," but retained the AA long-term debt rating.

S&P wrote that the policies of Hatoyama's government pointed to a slower pace of fiscal consolidation than previously expected, stating that the "political backdrop remains unconducive to major fiscal and structural reforms."

The loss of a finance minister early in the New Year through ill health did nothing to allay concerns about the government's resolve to contain debt. “The time will come when we need to discuss reforming taxes,” new finance minister Naoto Kan said in parliament, “but only after we have made every effort to eliminate wasteful and inappropriate spending.”

The DPJ government backtracked on some tax promises: for example, a gas tax was not abolished as expected. But only days ago the government reiterated its pledge not to raise the sales tax above the current 5% during the next four years.

Yoshito Sengoku, national strategy minister, described the S&P alert as a “wake-up call.” However, only in the last week has he brought together a team, including Finance Minister Kan, to develop a "medium-term fiscal strategy" which should report in June. It is feared that by then, the government will be more concerned about its approval ratings, prior to scheduled upper house elections in July, than making any tough decisions.

“The government needs to act now,” Masamichi Adachi, senior economist at JPMorgan Tokyo and formerly of the Bank of Japan, told Bloomberg. “We need reforms the size of the Meiji Restoration.”

The S&P downgrade followed the day after a government announcement that public debt is set to rise to JPY973 trillion (USD11 trillion) in the coming fiscal year commencing April 1, almost double GDP and the equivalent of JPY7.7m per head of population.

Linking this growth in debt with the structural problem of a shrinking Japanese population and only a modest return to economic growth, observers are wondering how much longer it is sustainable for domestic investors to hold more than 90% of Japan’s debt, with their benign influence enabling long-term bond rates to stay at around 2% for the last 11 years.

Reuters points to the increasing application of "non-tax revenues" against deficits; as much as JPY10.6 trillion (USD120bn) of such reserves may be used to balance a record JPY92.3 trillion budget for the coming fiscal year.

Such "revenues" are mainly derived from foreign exchange reserves and cash held under the government's Fiscal Investment and Loan program, but also include such things as public hospital charges and rents from government-owned buildings.

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