Kan Compiles $49 Billion Extra Budget to Start Japan Earthquake Rebuilding
Japanese Prime Minister Naoto Kan proposed a 4-trillion yen ($49 billion) extra budget that is likely to be the first of several packages to rebuild areas devastated by last month’s record earthquake and tsunami.
The government plans to fund the budget without increasing the 44.3 trillion yen in new bond issuances set for the year ending March 2012, according to a government statement released in Tokyo today. Bond sales will be necessary for a second reconstruction budget, the prime minister said at an evening news conference.
Kan has said several extra budgets may be needed to rebuild after the quake led to damage the government estimates could reach 25 trillion yen. To avoid boosting a debt burden double the size of the economy with a large increase in bonds, higher taxes may be imposed to fund future packages even at the risk of damping private demand already weakened by the disaster.
“Increasing taxes looks unavoidable,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo. “Rebuilding plans are ultimately about how the government will fund extra budgets without hurting its fiscal credibility.”
Japan’s benchmark 10-year bond yield fell to its lowest level since March 25 on optimism the government will fund the reconstruction at least partly with taxes to contain an increase in government debt. The yield dropped 1.5 basis points to 1.21 percent today.
‘Temporarily’ Use Bonds
“A second supplementary budget to ensure a genuine reconstruction will be of a considerable scale,” Kan told reporters. “It will become necessary to temporarily use government bonds to secure funding,” he said, adding that the details such as the scope of sales will need to be discussed.
The first budget will be financed using 2.5 trillion yen from pension funds as well as money originally intended to increase payments to families with children. The size of the proposed package was in line with predictions by officials including Kan. The government plans to submit the budget to parliament next week and win approval for it in the first week of May, Kan said.
The spending aims to provide more than 100,000 temporary housing, build infrastructure and clean up debris after the March 11 temblor which left more than 27,000 people dead or missing. Economic and Fiscal Policy Minister Kaoru Yosano said this week that reconstruction “must” be backed by higher levies.
‘Little Wiggle Room’
A Nikkei newspaper survey released on April 18 showed that 69 percent of people said they would support a tax increase to help pay for rebuilding.
The Organization for Economic Cooperation and Development yesterday urged the government to at least double the sales tax to 10 percent and to implement those increases as soon as possible. It also halved its estimate for Japan’s growth to 0.8 percent this year.
Japan has “very little wiggle room” to deploy stimulus and raising the sales tax alone won’t be enough to restore its fiscal health, OECD Secretary General Angel Gurria said in an interview yesterday with Bloomberg Television in Tokyo.
The Finance Ministry also said today it will sell 2 trillion yen of so-called zaito bonds during the current fiscal year to expand an emergency loan program for businesses hit by the disaster.
Those bonds are Japanese agency securities issued under the government’s Fiscal Investment and Loan Program. The sales increase will push up Japan’s total debt issuance this year to a record 171.6 trillion yen.
Finance Minister Yoshihiko Noda has said he needs to assess conditions in stricken areas in the northeast before discussing the size of a second extra budget and when to compile it.
The Cabinet has already unveiled measures to help people in disaster areas including tax breaks for victims whose homes were washed away or damaged by the tsunami.
The government imposed a 20-kilometer (12 mile) no-entry zone starting today around the crippled Dai-Ichi nuclear power plant in Fukushima prefecture amid the worst nuclear disaster since Chernobyl in 1986. It also allocated 18 billion yen for companies to help deal with power shortages caused by the shutdown of the plants.
Data have shown exports and confidence plunging while businesses have downgraded their profit forecasts, underscoring the widening impact of the quake. Exports fell 2.2 percent in March from a year earlier, the first drop in more than a year, and economists say those drops may accelerate in coming months.
Bank of Japan Deputy Governor Kiyohiko Nishimura said yesterday there’s a risk the disaster and the nuclear power plant accident “might put a chill on corporate investment and households’ consumption, thereby reducing expectations for Japan’s economy.”