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Japan’s Ruling Party Considers Bond Cap Pledge for Election

The Democratic Party of Japan is considering a pledge to cap bond sales next fiscal year, an indication politicians are becoming more attuned to the nation’s growing debt burden.

The party may promise to keep new bond sales for fiscal 2011 below the record 44.3 trillion yen ($477 billion) budgeted for this year in its platform for a July upper house election, DPJ Deputy Secretary-General Goshi Hosono told reporters in Tokyo today.

The pledge may put pressure on the party to backtrack on election promises that helped it defeat the Liberal Democrats in a lower house vote last August. Finance Minister Naoto Kan said for the first time this week that the government should try to cap next year’s bond sales, comments that Prime Minister Yukio Hatoyama stopped short of supporting.

The DPJ probably thinks that “to demonstrate its capacity to govern, it must show that it has a good understanding of public finances,” said Takuji Aida, senior Japan economist at UBS AG in Tokyo. “We won’t know until the very end whether the DPJ decides to focus on fiscal rebuilding, or on the more short-term issues of beating deflation and delivering on its campaign promises.”

Japanese officials have been emphasizing fiscal discipline in light of fiscal woes in Europe that prompted policy makers in the region to unveil an unprecedented rescue package for its most indebted nations this week.

Learn From Greece

Kan and National Strategy Minister Yoshito Sengoku have said they need to learn from Greece’s debt crisis given Japan has the largest borrowings in the industrialized world.

The Finance Ministry in January forecast that new bond sales may climb 16 percent to 51.3 trillion yen in the year starting April 2011, underscoring the difficulty the government may have in keeping debt below this year’s levels.

The government needs to secure 2.8 trillion yen to fulfill a promise to double child-care allowances next fiscal year, according to DPJ calculations. It has also pledged to provide financial support to farmers.

Hatoyama, faced with declining approval ratings, said this week that while Kan’s comments were “understandable,” the bond sale goal isn’t something the government has decided on.

Vice Finance Minister Yoshihiko Noda, a DPJ lawmaker, last month indicated he would rather scale back election promises than exacerbate the public debt. He said it would be “hypocrisy” to issue more bonds to double the childcare handouts because debt should only be issued after cutting unnecessary spending.

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