TOKYO
- "We have achieved a lot," said a senior Ministry of
Finance (MOF) official on Monday while presenting the
heavily debt-ridden central government budget for fiscal
2005. The ministry proposed a 82.1 trillion yen (US$790
billion) draft national budget for next year, up 0.1%
from the initial fiscal 2004 budget. This is the third
straight year of such an increase as the rising cost of
servicing the national and local debt grows faster than
policy-driven spending cuts.
All that bragging
about achievement may sound a bit cheeky for a
government whose outstanding national debt is expected
to reach 774 trillion yen by the end of next year. This
will amount to some 1.51 times the value of Japan's
gross domestic product (GDP). Moreover, the government
is faced with fresh worries about the economic recovery
that had been picking up in the past couple of years.
The same central government is about to launch
its first overseas "road trip" at the start of the new
year in January to help sell more of its national bonds
to the rest of the world. At the moment, Japan has
managed without too much strain to sell virtually all of
its debt at home, where high (though shrinking) domestic
savings rates have stabilized the economy. The
promotions lined up in London and New York are a sign
that the MOF, after over a decade of floundering, has
regained a measure confidence in the fourth year of the
tenure of Prime Minister Junichiro Koizumi, who rose to
power on a platform of fiscal prudence and structural
reform.
Ministry officials have relearned the
virtues of fiscal prudence after presiding over massive
public spending in the mid-1990s to stave off, with
little success, the recessions of the post-bubble era.
The MOF had been stripped of much of its power and even
lost its old Meiji-era name, the Okurasho. MOF
officials have attempted to bring fiscal order back.
Despite a minor increase in the draft for the general
account budget, expenditures will shrink 0.7% to 47.2
trillion yen, the first decline in three years.
This covers a wide swathe of what are regarded
as "policy-related" discretionary spending that excludes
compulsory costs such as debt servicing and tax grants
to local authorities. Only two sectors - social security
for an aging society and a broad range of "scientific"
spending - have been spared the axe. Other key areas
such as defense spending are being cut back, or
restricted. The government is considering cutting
overseas aid, particularly to China, which is now
becoming an economic power in its own right. Official
Development Assistance (ODA) will be slashed 3.8% to
786.2 billion yen in its sixth straight annual fall.
There is the inevitable dose of pork barrel
spending, such as an expanded airport in the Kansai
region serving Osaka, and three more fast Shinkansen
train lines. The government is also pushing ahead with a
new relationship between local governments and the
central authorities, a policy named "Trinity" that aims
at sharing more tax revenue. But the Fiscal Investment
and Loan Program (FILP) will be trimmed. The spending
cuts in most policy areas and growing tax revenue - due
to the higher-than-expected growth until recently -
should allow the government to finance next fiscal
year's budget with a smaller fresh bond issue for the
first time in four years.
The ministry forecasts
the issue of new government bonds at 34,390 billion yen,
down 6% from fiscal 2004. Tax revenue is projected to
total 44 trillion yen in fiscal 2005, up 5.4% from the
current fiscal year, the first increase in four years,
on brisk corporate earnings spurred by Japan's economic
growth. The most controversial tax hike will be imposed
a year later, in 2006. The ruling Liberal Democratic
Party (and its New Komeito coalition partner) rolled
back a tax cut put in place in 1999 as an
economy-boosting measure. With the economy flagging,
some now question the wisdom of the hike.
"We
have maintained and strengthened our position to reform
government spending," Finance Minister Sadakazu Tanigaki
said while outlining the draft budget. "We were able to
curb spending while shifting funds to key areas to
compile an efficient budget. An expected increase in tax
revenue will also help the government move a step
forward in achieving balanced structural reform in state
finance," he said.
Japan's primary deficit will
stand at 15.9 trillion yen in fiscal 2005, down 3
trillion yen from the current fiscal year for the second
straight year. The government's goal is to reach what it
calls a "primary surplus" - with tax revenues rising
above expenditures minus debt-servicing costs - by the
early 2010s. The cabinet will tinker with the daft
budget in the next few weeks to produce a final draft by
the end of this week. The budget will then be presented
to a regular Diet (parliament) session to convene in
January.
The debate over how Japan's economy
will take to the somewhat austere budget is, meanwhile,
heating up. The Bank of Japan and the Cabinet Office are
taking a hard look at the somewhat optimistic "basic
economic assessments" following a December report by the
central bank that business conditions are cooling off in
some sectors. This would mark the second monthly
downgrading in a row, a negative signal that was last
seen in early 2003.
The Bank of Japan earlier
this week released the tankan, the quarterly
sampled business indices. What sets the tankan
apart from other surveys is that the central bank
polls business opinion directly. According to the
tankan report, business confidence in Japan's
large manufacturers in the October-December quarter
turned sour for the first time in 21 months. More
alarming to some is that the outlook for the first
quarter of 2004 is expected to be even bleaker. If the
survey proves correct, the Koizumi government will find
itself raising taxes just as the economy is slowing. In
November, the Cabinet Office's latest quarterly figures
on GDP revealed the slowest growth since the economy
began to grow out of the last recession six quarters
ago.
Economists are treading cautiously. "We
confirmed that the economy has entered a consolidation
phase," said Hideki Matsumura, senior economist at the
private Japan Research Institute Ltd. Other analysts
shared his view. "There are some strong indices which
show supply shortages, a lot of it because of the Iraqi
war," said Phillip A Jones, an economist for Fitch
Ratings.
On the more bullish side, however, is
the governor of the Bank of Japan, Toshihiko Fukui, who
has in recent public talks emphasized that the economy
is likely to achieve a sustainable recovery though it
has been slowing recently. The current slowdown will
prove only temporary, with the mechanism of economic
recovery still working, Fukui told a business group
before the tankan was released. Japan's economic
activity at the moment is dependent to a large degree on
overseas economies, namely the United States and China,
whose economic activity continues to expand, albeit at a
slower pace. The BOJ governor said he expect Japanese
firms' capital expenditures to continue increasing on
the back of their robust earnings. He also pointed to
improvement in Japan's financial system, which is no
longer a major threat to the nation's economy. Major
banks have been cleaning up bad loans to large, troubled
borrowers. The Cabinet Office's plans to downgrade its
basic economic assessment in December is largely due to
production and inventory adjustments in the once-booming
information technology-related sectors. In its monthly
economic report for November, which saw the first
downgrading of the assessment in 17 months, the
government said "the economy continues to recover, while
some weak movements were seen recently" - in contrast to
the October assessment that the economy is "recovering
at a solid pace".
Economic and Fiscal Policy
Minister Heizo Takenaka will submit the report at a
cabinet meeting. Following the release of the
tankan survey on Wednesday, Takenaka said the
Japanese economy is now in an adjustment stage but is
unlikely to head downward. The government does not
intend to change its view that the economic recovery
trend is continuing. What the Bank of Japan's
tankan also produced was a lot of hedging of bets
for investors. "You can read the tankan as
positive for the economy, but there are also a lot of
negative news," said veteran securities analyst, Edward
C Merner, president of Atlantis Investment Research.
Currency swings loom ominously, said JP Morgan
Chase Bank's Tohru Sasaki, a former Bank of Japan
official and currently chief foreign exchange
strategist. He takes a long-term view that the yen could
rise as high as 88 to the dollar. "If we see a super
strong Japanese yen during 2005, the dollar-yen rate can
go to 65," he said last Friday. There could also be a
strong rise against the euro, he added.
The yen
hit 101 against the dollar earlier this month for the
first time in five years and crude prices, while off a
recent peak, are still high. Prices of iron ore, steel
and other materials are also skyrocketing, which, along
with shortages of steel, have hit manufacturers who have
seen demand from China rise. That has prompted some
larger manufacturers to revise upward their estimated
growth in combined profits for fiscal 2004 by 5.1
percentage points from the previous tankan survey
to 24%. Their estimated ratio of recurring profit to
sales came to 5.78%. That is higher than the previous
peak marked during the bubble economy more than a dozen
years ago, according to the Bank of Japan data.
The latest report also said that combined
capital spending in all industries in fiscal 2004 was
expected to show a 6.2% rise from the previous year, an
"unexpectedly large" 2.6-point upward revision. The
question is whether the caution kindled by the
tankan report will blot out optimistic signs, and
perhaps undermine the MOF's "achievements".
Richard Hanson, veteran correspondent
and expert on Japanese economy, finance and politics is
the author of Money Lords: The Pride and Folly of
Japan's Finance Ministry Elites.
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