Japan Fiscal Pressure Rises as Tax Increase Not Enough: Economy

Japanese Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japan’s government said it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, underscoring the scale of the nation’s fiscal challenges.

The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said in Tokyo today. Hours after the release, Prime Minister Yoshihiko Noda reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy.

Addressing the shortfall through faster growth may be a limited option for Japan, where the central bank has already cut the key interest rate near zero and the traditional boost from a trade surplus last year evaporated -- for the first time since 1980. Absent structural changes that boost incentives to spend and invest, today’s report signals further fiscal tightening will be needed to rein in the world’s largest public debt.

“To balance the budget, the rate needs to rise further,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, referring to the sales-tax level. “We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

The Cabinet Office release assumed average growth of 1 percent annually over the period through the 2020 fiscal year. The Bank of Japan today cut its projection for gross domestic product for the year starting April 1 to 2 percent from an October estimate of 2.2 percent.

‘Flat’ Economy

“Japan’s economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen,” the BOJ said. “Growth prospects for fiscal 2012 and 2013 will likely remain broadly unchanged because the economy is expected to gradually return to a moderate recovery path,” it said.

Europe’s debt crisis has both hampered Japanese exports and contributed to a strengthening in the yen, which has benefited from investor risk aversion because of Japan’s status as the world’s largest net creditor -- a legacy of past trade surpluses. The currency has climbed about 17 percent versus the dollar in the past two years, undermining earnings from shipments abroad.

“European sovereign problems continue to be the biggest threat for Japan and the global economy,” BOJ Governor Masaaki Shirakawa told reporters in Tokyo today. “In terms of capital markets, tension has eased somewhat but the overall picture concerning the fundamental problems hasn’t changed.”

The yen traded little changed today at 77.05 per dollar as of 5:16 p.m., compared with the postwar high of 75.35 reached on Oct. 31. Toyota Motor Corp. Chief Executive Officer Akio Toyoda said this month the “ideal” rate is 90. Asia’s largest automaker cut its profit forecast by more than half in December.

First Since ‘80

A government report tomorrow may show a 170 billion yen ($2 billion) merchandise trade deficit for December, the median estimate in a Bloomberg News survey shows. That would cap the first annual excess of imports over exports since 1980, Finance Ministry data show. While the figure reflects disruptions to factories after the March 2011 earthquake, UBS AG analysts this month projected that net exports won’t contribute to growth again until 2013.

Among other economic releases today, India’s central bank cut the cash reserve ratio to 5.5 percent from 6 percent and signaled future cuts. The International Monetary Fund will unveil revisions to its World Economic Outlook at 10 a.m. in Washington. Without giving specific estimates, IMF Managing Director Christine Lagarde said yesterday in Berlin that “we will lower growth forecasts for most parts of the world.”

French Manufacturing

In Europe, preliminary reports on French manufacturing and services may show both deteriorated this month, according to economists’ estimates before purchasing managers surveys are released. Similar reports from Germany and a broader measure for the euro region may show manufacturing and services improving, other surveys of economists showed. A report on Russia’s unemployment rate is forecast to show an increase in December to 6.6 percent from 6.3 percent.

In Japan, the central bank today kept its asset-buying fund at 20 trillion yen, and its credit-lending program at 35 trillion yen. The benchmark rate was held in a range of zero to 0.1 percent. The unanimous decisions were in line with predictions of all 14 economists surveyed by Bloomberg News.

‘Significant Risk’

Noda, speaking at the opening session for 2012 of the Diet, called for improved coordination with the Bank of Japan on addressing the yen and deflation, which has afflicted the nation for more than a decade. Finance Minister Jun Azumi told lawmakers that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.”

“Further fiscal improvements would be necessary” to meet the goal of a primary budget balance in the 2020 fiscal year, the Cabinet Office said today.

Standard & Poor’s in November said Noda’s administration hasn’t made progress in tackling the issue and indicated it may be preparing to lower the nation’s sovereign grade. S&P rates Japan AA- and has had a negative outlook since April.

Noda’s ruling Democratic Party of Japan plans to raise the sales tax to 8 percent in April 2014 and then to 10 percent in October 2015. Lawmakers opposing the increase in the levy have said it may hamper growth at a time when the economy is recovering from the March 2011 record earthquake.

More Efforts

The government is stepping up efforts to cut the budget deficit, with it saying today it will reduce the number of special accounts, or funds managed separately from the main budget, to 11 by the end of fiscal 2015 from 17. Japan had about 40 special accounts through the early 2000s and the government has sought to reduce them and use the untapped funds and increase fiscal transparency.

The country will have a primary deficit that’s 3.6 percent of GDP in the year starting April 2015, today’s report showed. The government in 2010 set a goal of halving the ratio to about 3.4 percent in five years.

Japan, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said this month. The country risks seeing a spike in government bond yields unless it controls the outstanding borrowing set to approach 230 percent of gross domestic product in 2013, according to the Organization for Economic Cooperation and Development.

The sales tax proposal still needs to be approved by parliament. About 57 percent of the public opposes raising the levy, and the approval rating for Noda’s Cabinet fell to 29 percent from 31 percent last month, according to a survey by the Asahi newspaper.

The Cabinet Office also forecast Japan’s consumer prices will rise 0.1 percent in the next fiscal year and keep advancing through the projected period through 2023.

The forecasts are calculated based on central government debt. When local municipalities are included, the country will have a deficit of 3.3 percent of GDP in fiscal 2015 and 3 percent in fiscal 2020, the government said.