Japan Budget’s Dependence on Debt Sales to Rise to Record Next Fiscal Year

Japan’s budget for the year starting April showed the government more dependent than ever on bond sales to fund spending as Prime Minister Yoshihiko Noda struggles to tame the world’s biggest public debt burden.

The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s dependence on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo yesterday showed. Spending will shrink for the first time in six years after the government delayed appropriations for the nation’s pension fund and used supplementary expenditure packages to pay for earthquake reconstruction.

Noda’s first budget may fail to reassure credit-rating companies and analysts monitoring his efforts to control public debt twice the size of annual economic output. The government trimmed 2.6 trillion yen from the package by allocating special bonds to delay pension funding until a planned sales-tax increase boosts revenue.

“The government is trying to maintain surface appearances by playing with the numbers,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “This budget clearly shows Japan’s fiscal situation is worsening.”

Noda will submit the budget bill to parliament next year.

The primary deficit will narrow to 24.1 trillion yen, the Finance Ministry said, equivalent to about 5.1 percent of gross domestic product. Noda aims to post a primary balance, achieved when revenue matches spending, excluding bond sales and interest payments, by 2020.

Tax Revenue

New bond issuance will surpass tax revenue for a fourth year, the government predicts. Receipts from levies have shrunk about a third after peaking at 60.1 trillion yen in 1990.

“It’s very regrettable that bond sales will exceed tax revenues and that debt dependence rose to 49 percent,” Azumi told reporters in Tokyo yesterday. “I think the reliance on bonds to compile budgets is reaching its limit.”

Non-tax revenues including surplus from foreign exchange reserves halved to 3.7 trillion yen. The budget plan includes a 3.8 trillion yen special account for reconstruction spending.

Expenditures in the current fiscal year’s initial budget totaled a record 92.4 trillion yen. The government had planned to cap new bond issuance at 44.3 trillion yen next year.

An aging population and reduced growth since an asset bubble popped in the early 1990s have left the nation with debt projected at a record 1 quadrillion yen this fiscal year. The economy is smaller than a decade ago and remains mired in deflation.

Social-Security Spending

Social-security expenses, which have become 2.5 times more than that of two decades ago, will account for 52 percent of general spending next year.

The Bank of Japan said Dec. 21 that activity in the world’s third-biggest economy is looking “flat,” downgrading its assessment. The government estimated that the economy will shrink 0.1 percent this fiscal year on supply-chain disruptions from the record temblor in March, the strengthening of the yen and the European debt crisis.

Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. (7203) on Dec. 22.

The Japanese currency traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31. The government allocated 21.9 trillion yen for debt servicing costs on the premise that benchmark 10-year yields will remain below 2 percent. Japan’s debt burden hasn’t impeded the government’s ability to borrow, with the 10-year bond yield at 0.97 percent on Dec. 23.

Reconstruction Demand

“Japan will barely grow by the middle of next year,” Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo, said before the budget announcement. “The negative impact of a global slowdown centered on the European debt crisis will probably surpass the positive impact of demand from reconstruction at home.”

In a step unseen since 1947, Japan’s Cabinet has approved a fourth extra budget, to rebuild devastated northeast regions and spur growth. The nation has compiled about 20 trillion yen of the supplementary packages after the March 11 earthquake.

Japan is on “a dangerous path” as the government relies on an increased sales tax that is not certain to be enacted, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.

The ruling coalition plans to raise the sales levy to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources. The Finance Ministry estimates each 1 percentage point increase will reap about 2.5 trillion yen of revenue.

Rating Warning

Noda faces opposition to raising the tax from the public and within his Democratic Party of Japan, even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.

About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people.

The ruling Democratic Party of Japan lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the sales tax. DPJ members including Ichiro Ozawa, a former party leader, are opposed.

Noda’s popularity has fallen since he took office in September, with his approval rating dropping to 32.4 percent this month from 35.5 percent in November, Jiji Press reported Dec. 16.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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