Abe Aims to Cap Spending Growth to Rein in Japan’s Debt Burden

The Abe administration aims to cap increases in spending as it tries to rein in the world’s heaviest debt load while sustaining a recovery from two decades of stagnation.

Spending growth over the next three fiscal years should be limited to a total of 1.6 trillion yen ($13 billion), excluding debt payments and grants to local governments, the same amount as the past three years, according to a draft plan released on Monday. The Japanese government also seeks to cut the deficit to 1 percent of gross domestic product, excluding interest payments, by the year starting in April 2018 and reach a surplus in fiscal 2020.

Securing investor confidence in the nation’s finances is crucial to keep bond yields in check as Prime Minister Shinzo Abe tries to revive the economy and the central bank buys record amounts of debt to spur inflation. While a cap on spending is a step toward fiscal consolidation, the government has yet to put forward a realistic road map to achieving a primary balance surplus by fiscal 2020, according to Hidenori Suezawa, an analyst at at SMBC Nikko Securities Inc.

According to the information released Monday, the government aims over the longer term to lower its debt as a proportion of GDP. The International Monetary Fund projects this will rise to 247 percent next year.

Moody’s Investors Service cut its credit rating on Japan last December, citing uncertainty over whether the country will achieve deficit-reduction goals and succeed in boosting growth.

Controling social welfare outlays is vital for the government to consolidate its finances as this expenditure accounts for about one third of the national budget.

Social welfare spending over the past three years grew by about 1.5 trillion yen, and the government will try to limit any acceleration in this trend through fiscal 2018, while also considering economic and price conditions, it said.

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