Japanese Prime Minister Shinzo Abe’s government predicts that tax revenue will exceed cash raised from bond sales for the first time in four years as the nation’s economy emerges from last year’s recession.
The government forecasts 43.1 trillion yen ($474 billion) of tax revenue for the coming fiscal year, which starts April 1, compared with 42.85 trillion yen from issuing bonds, Finance Minister Taro Aso said in Tokyo late yesterday. Total spending is forecast at 92.6 trillion yen.
A rosier outlook for tax receipts may help Abe as he applies short-term fiscal stimulus and prepares for an overhaul of levies designed gradually to rein in a debt burden that’s more than twice the size of the economy. He’s relying on improvements in corporate profits even as the shutdown of most of the nation’s nuclear plants and weakness in the yen drive up energy costs for manufacturers.
“We can’t say that fiscal discipline is fully ensured by this budget,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. and a former Bank of Japan (8301) official. “Actual tax revenue could fall short of the government’s forecast.”
The government today raised its economic growth forecast for the next fiscal year to 2.5 percent from an August estimate of 1.7 percent after declines in the yen and the unveiling of a stimulus package this month. Nominal growth is seen at 2.7 percent, from an earlier forecast of 1.9 percent, the cabinet office said.
In a policy speech to the opening session of the Diet today, Abe laid out his agenda as he seeks support for coming Bank of Japan personnel appointments and his tax overhaul. The prime minister has the chance to replace Governor Masaaki Shirakawa in April and two deputies in March with policy makers who support monetary stimulus to revive growth.
“We won’t be able to escape deflation and the strong yen by continuing with policies of the past,” Abe said in his speech. “That’s why I am suggesting a bold policy package on a different scale.”
Abe called for a closer relationship with the BOJ, adding it is important for the central bank to achieve its 2 percent inflation target announced last week “as soon as possible.”
Consumer price growth is seen at 0.5 percent in next fiscal year, according to the forecasts released today. The economy shrank in the second and third quarters of last year. The government’s initial forecast for tax revenue in the 2012 fiscal year was 42.3 trillion yen.
The government plans to sell more than 155 trillion yen of bonds to the market in the fiscal year beginning in April, a record high, according to two government officials who asked not to be identified due to government policy. In the current fiscal year, the government budgeted for 149.4 trillion yen in bond sales.
Japan plans to sell several hundred billion yen in inflation-linked bonds next fiscal year, according to two government officials speaking on condition of anonymity due to the government’s policy. Sales of the debt ended in 2008 amid a lack of demand.
“We’ve been saying for three years that bond issuance exceeding tax revenue is abnormal,” Aso told reporters yesterday evening. That tax receipts will be higher this time is “a big deal,” he said.
The yen strengthened 0.2 percent to 90.71 per dollar at 4:58 p.m. in Tokyo. The Nikkei 225 Stock Average closed 0.9 percent lower.
To raise revenue, Abe’s Liberal Democratic Party proposes increasing the top income tax rate to 45 percent from 40 and the inheritance tax to 55 percent from 50 percent. It also calls for encouraging the transfer of generational wealth by offering reduced tax rates on gifts to children and grandchildren.
Abe is the first Japanese prime minister to see his popularity rise after his initial month in office since Junichiro Koizumi in 2001, according to a Nikkei newspaper poll that showed voters favor his policy on monetary stimulus. His approval rating rose six percentage points to 68, according to the poll by telephone between Jan. 25-27.
His administration has also sought a weaker yen to aid export competitiveness. At the World Economic Forum’s annual meeting in Davos, Switzerland, Japanese Economy Minister Akira Amari said Jan. 26 that the new government is not actively targeting a weaker currency, instead aiming at defeating deflation.
Japan is “absolutely not deviating from global standards,” Amari said in Davos. “I don’t comment on a foreign-exchange rate because it should be determined by the market. What we do is to implement policies.”
Amari spoke at the end of a week in which German and Canadian policy makers joined a worldwide chorus highlighting a recent plunge in the yen as a worry. The currency has declined to its lowest against the dollar since June 2010 as Abe pushes for easier monetary policy.
That strategy has sparked criticism that Abe is trying to weaken the yen to stoke exports, breaching a pledge by Group of 20 economies not to competitively devalue exchange rates for fear of sparking a so-called currency war.
“The Abe administration attaches its highest priority to exiting from prolonged deflation partly accompanied by the appreciation of the yen, and revitalizing the economy,” Amari said.
“Many nations said they welcome and support Japan’s new measures,” he told reporters. “Misunderstandings held by a small group of people have been cleared up.”
Speaking on the same Davos panel, Bank of Canada Governor Mark Carney commended Japan’s focus on beating deflation. Carney, who will move to the Bank of England in July, said Amari had been “very clear and the Bank of Japan is clear in terms of the policy focused on a domestic inflation target.”
German Chancellor Angela Merkel said on Jan. 24 in Davos that “I can’t say I’m completely free of worry when I look at Japan right now.” Canadian Finance Minister Jim Flaherty told Bloomberg Television’s Erik Schatzker three days ago that he’s spoken to Japan Finance Minister Taro Aso about exchange rates.
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