TOKYO: Japan set ambitious targets to rein in its debt on Tuesday, June 22 but admitted they would not be met even under its rosiest growth scenario, setting the stage for contentious tax hikes to fill deep fiscal gaps.
In a sharp turnaround from his predecessor, new Prime Minister Naoto Kan has made fiscal reform a top priority ahead of a July 11 upper house election, vowing to consider doubling the 5% sales tax, although not for at least two or three years.
Analysts said the plan, while lacking in details, was enough to avoid an imminent credit ratings downgrade and suggested that the long-mooted hike in consumption tax would be needed for the targets to be met.
Investors will be watching to see how the tax reform debate progresses after the upper house election, which Kan's Democratic Party needs to win to smooth policymaking.
Tuesday's plan did not factor in any tax hikes but said the government should reach an early conclusion on overhauling the sales tax and other taxes.
"The mention of tax is implicit recognition that something along the lines of a tax hike would be necessary," said David Cohen, director of Asian economic forecasting, at Action Economics in Singapore.
"It probably would have limited impact on the sovereign rating now, but the sovereign rating is likely to see some erosion as ratings agencies apply more scrutiny to all countries."
Economists say the government needs to commit to raising the sales tax to 15% or even 20% over the next 10 to 15 years to pay for rising social welfare costs and a commitment to hike tax is needed to make its fiscal plans look credible. But many also worry tax hikes could hurt growth.
The plan lacked specific ideas of how to meet its long-term aim of achieving budget balance targets and reducing its debt-to-GDP ratio ' now estimated at nearly twice the size of GDP, the worst in the developed world.
Kan has put a debate on a consumption tax hike at the heart of Democratic Party's campaign for the upper house poll, which the party needs to win to ensure smooth policymaking.
Coalition dynamics could complicate the push for fiscal reform if the Democrats fall short of a majority in the upper house, which can delay bills, although analysts say a future sales tax rise is inevitable.
"At the end of the day, most people realise that a rise (in the sales tax) is a question of time. It has to be done at some time and the question is the timing and what should be done first," said Koichi Nakano, a Sophia University professor.
Avoiding Greek tragedy
The government pledged to do its utmost to keep new debt issuance in the year to next March at or below about the ''44 trillion (US$483 billion) that has been earmarked for this year, while aiming to steadily reduce bond issuance thereafter.
"We must prevent a situation like Greece, where Japan loses the confidence of bond markets, pushing interest rates higher and leading its finances into a state of collapse," the plan said.
September 10-year JGB futures were little changed following the release of the fiscal strategy.
Ratings agencies have threatened to cut Japan's sovereign debt rating unless it crafts a credible plan to rein in its debt.
The government still has a massive pool of bank deposits to fund its deficits in the near term. But fears that this could change in the long term as an ageing population starts drawing on savings have led to a rise in demand for protection against the risk of default in Japanese government bonds in the credit default swaps market.
To ease such concerns, the plan calls for Japan to bring primary budget balance into the black within a decade ' a goal it has not met since the bursting of an asset bubble early in the 1990s. The primary budget balance excludes revenue from bond sales and debt-servicing costs.
To achieve this, the government said it will halve Japan's primary budget deficit ' now estimated at ''30.8 trillion, or 6.4% of GDP ' by the fiscal year from April 2015.
From fiscal 2021/22 the government will aim to stably lower the debt-to-GDP ratio.
But the Cabinet Office estimated that neither the budget balance goals nor the debt-GDP ratio goals could be met under the government's growth strategy, which calls for an average 2% real growth by fiscal 2020/21.
The government also set a cap on policy-related expenditures in each of the three years from fiscal 2011/12 and said it will adopt a pay-as-you-go strategy to ensure it secures stable revenue sources in case it implements new policy steps that require more spending or revenue cuts.
The timeframe of fiscal targets in the plan may change if an economic crisis occurs and makes it harder to achieve them. ' Reuters
In a sharp turnaround from his predecessor, new Prime Minister Naoto Kan has made fiscal reform a top priority ahead of a July 11 upper house election, vowing to consider doubling the 5% sales tax, although not for at least two or three years.
Analysts said the plan, while lacking in details, was enough to avoid an imminent credit ratings downgrade and suggested that the long-mooted hike in consumption tax would be needed for the targets to be met.
Investors will be watching to see how the tax reform debate progresses after the upper house election, which Kan's Democratic Party needs to win to smooth policymaking.
Tuesday's plan did not factor in any tax hikes but said the government should reach an early conclusion on overhauling the sales tax and other taxes.
"The mention of tax is implicit recognition that something along the lines of a tax hike would be necessary," said David Cohen, director of Asian economic forecasting, at Action Economics in Singapore.
"It probably would have limited impact on the sovereign rating now, but the sovereign rating is likely to see some erosion as ratings agencies apply more scrutiny to all countries."
Economists say the government needs to commit to raising the sales tax to 15% or even 20% over the next 10 to 15 years to pay for rising social welfare costs and a commitment to hike tax is needed to make its fiscal plans look credible. But many also worry tax hikes could hurt growth.
The plan lacked specific ideas of how to meet its long-term aim of achieving budget balance targets and reducing its debt-to-GDP ratio ' now estimated at nearly twice the size of GDP, the worst in the developed world.
Kan has put a debate on a consumption tax hike at the heart of Democratic Party's campaign for the upper house poll, which the party needs to win to ensure smooth policymaking.
Coalition dynamics could complicate the push for fiscal reform if the Democrats fall short of a majority in the upper house, which can delay bills, although analysts say a future sales tax rise is inevitable.
"At the end of the day, most people realise that a rise (in the sales tax) is a question of time. It has to be done at some time and the question is the timing and what should be done first," said Koichi Nakano, a Sophia University professor.
Avoiding Greek tragedy
The government pledged to do its utmost to keep new debt issuance in the year to next March at or below about the ''44 trillion (US$483 billion) that has been earmarked for this year, while aiming to steadily reduce bond issuance thereafter.
"We must prevent a situation like Greece, where Japan loses the confidence of bond markets, pushing interest rates higher and leading its finances into a state of collapse," the plan said.
September 10-year JGB futures were little changed following the release of the fiscal strategy.
Ratings agencies have threatened to cut Japan's sovereign debt rating unless it crafts a credible plan to rein in its debt.
The government still has a massive pool of bank deposits to fund its deficits in the near term. But fears that this could change in the long term as an ageing population starts drawing on savings have led to a rise in demand for protection against the risk of default in Japanese government bonds in the credit default swaps market.
To ease such concerns, the plan calls for Japan to bring primary budget balance into the black within a decade ' a goal it has not met since the bursting of an asset bubble early in the 1990s. The primary budget balance excludes revenue from bond sales and debt-servicing costs.
To achieve this, the government said it will halve Japan's primary budget deficit ' now estimated at ''30.8 trillion, or 6.4% of GDP ' by the fiscal year from April 2015.
From fiscal 2021/22 the government will aim to stably lower the debt-to-GDP ratio.
But the Cabinet Office estimated that neither the budget balance goals nor the debt-GDP ratio goals could be met under the government's growth strategy, which calls for an average 2% real growth by fiscal 2020/21.
The government also set a cap on policy-related expenditures in each of the three years from fiscal 2011/12 and said it will adopt a pay-as-you-go strategy to ensure it secures stable revenue sources in case it implements new policy steps that require more spending or revenue cuts.
The timeframe of fiscal targets in the plan may change if an economic crisis occurs and makes it harder to achieve them. ' Reuters
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