Q+A-What would a credible fiscal plan in Japan need to say?

By Stanley White

TOKYO, June 11 (BestGrowthStock) – Japan’s new government will
unveil a strategy to fix its tattered finances by June 22, the
national strategy minister said on Friday, in an effort to
reassure investors that it will cut back the country’s massive
debts.

Prime Minister Naoto Kan says the debt is the “biggest
issue that the country must tackle” and the country risks a
default if it fails to deal with it.

The strategy will consist of a medium-term fiscal plan that
includes binding caps on spending for the state budget over the
next three years, plus a set of longer-term targets to bring
the primary balance into surplus.

One aim will be to reduce the ratio of outstanding public
debt to GDP, which at around 200 percent is the biggest in the
developed world.

The government needs to lay out a credible plan to keep the
support of investors longer term and avoid a credit ratings
downgrade. Investors are already expressing concerns about
Japan’s fiscal outlook through the credit default swaps market.

Following are questions and answers on what markets see as
necessary for the strategy to be credible:

HOW QUICKLY SHOULD JAPAN TARGET A PRIMARY BUDGET SURPLUS?

The government has projected a primary deficit, the budget
balance excluding revenue from bond sales and debt servicing
costs, of 33.5 trillion yen ($366 billion) for the current
fiscal year that started on April 1.

Japan should aim to bring that to surplus in the next five
to 10 years, economists say.

Promising to erase the deficit any sooner would be
unrealistic, while setting a longer timeframe would not lower
the overall debt burden, they say.

The Nikkei newspaper reported on Friday that the government
aimed to bring the deficit into surplus by March 2021 — the
limit of that five to 10 year range.

But Finance Minister Yoshihiko Noda said that the report
was “clearly wrong” and that the government had not finalised
its plans.

“The government ideally should aim for a primary balance
surplus in five to seven years. Ten years would be too long. If
the current economic recovery continues, it would be possible
to achieve the surplus within five years,” said Seiji Adachi,
senior economist at Deutsche Securities in Tokyo.

Yasuo Yamamoto, senior economist at Mizuho Research
Institute in Tokyo, said it was important to create a feasible
mechanism to cut the fiscal deficit in the medium to long term.

“The initial goal would be a primary balance target and
cutting deficits to half in the next five years and achieving
surplus within 10 years is desired,” Yamamoto said.

HOW LONG SHOULD JAPAN TAKE TO LOWER THE DEBT-GDP RATIO?

They key issue is for the government to commit to a
timeframe for cutting the primary budget deficit.

It needs to commit to reducing the debt-GDP ratio over time
but specific increments tied to dates are not needed. The
reasoning is Japan cannot lower the debt-GDP ratio without
first returning to a primary budget surplus.

Investors should focus more on how aggressive the timetable
is for the primary budget surplus and monitor the government’s
fiscal policy to see if it is on track, economists say.

SHOULD THE GOVERNMENT CAP NEW DEBT ISSUANCE?

Japan will pledge to cap new bond issuance next fiscal year
at the record 44.3 trillion yen earmarked for this year,
National Strategy Minister Satoshi Arai said on Friday.

As finance minister, Prime Minister Naoto Kan had said he
wanted to cap new bond issuance at that level.

Economists and credit ratings agencies say it’s important
for the government to underline its intention to cap new bond
issuance in the fiscal discipline plan, but it would be
imprudent to aggressively lower the cap in the next year or
two. The government needs to allow some leeway for economic
growth to become established following the shocks of the global
downturn.

“Our view is that Japan’s ratings will come under downward
pressure in the medium term unless the public finances get on a
sustainable footing,” said Andrew Colquhoun, director in
Fitch’s sovereigns ratings team in Hong Kong.

“Whether 44.3 trillion yen is achieved or not this year is
secondary to that question. The framework needs to have enough
flexibility to cope with the unexpected, and should be
transparent about how a consolidation path would be restored
even if a negative shock requires some departure for a period.”

SHOULD THE GOVERNMENT SAY IT WILL RAISE THE SALES TAX?

Yes. But it won’t.

The sales tax, applied to the retail sales of items
including clothes and food, is currently just 5 percent, lower
than other major economies.

For years, successive governments have danced around the
issue, fearful of committing to a rise in the tax in case
voters turn against them.

The government needs to commit to raising the sales tax to
15 percent or even 20 percent over the next 10 to 15 years to
pay for the rising social welfare costs of a rapidly ageing
population, economists say.

However, markets already fully expect the government to
fudge the issue once again by making a vague reference to
beginning a debate on tax reform at some point in the future.

Opinion polls have shown that the public is willing to
accept a higher consumption tax to pay for rising healthcare
costs. But many ruling party lawmakers are reluctant to pledge
a sales tax hike ahead of the July upper house election.

SHOULD THE GOVERNMENT CUT HEALTHCARE SPENDING?

Japan’s ageing population means healthcare costs will
inevitably rise, so promising to lower welfare spending is
needed, economists say.

But the government will struggle to lower welfare spending
unless it encourages more private-sector participation in
healthcare, economists say.

Stock Market Today

(Editing by Neil Fullick)
(Additional reporting by Rie Ishiguro, Kaori Kaneko and
Charlotte Cooper)

Q+A-What would a credible fiscal plan in Japan need to say?