UPDATE 1-Japan aims to keep spending, bond caps in 2011/12

(For more stories on the Japanese economy, click [ID:nECONJP])

* Aim to cap general account spending costs around Y71 trln

* Sengoku: no change to Y44.3 trln yen new bond issuance cap

* Sengoku: hope to formalise budget guidelines by end-July
(Adds details, government spokesman)

By Rie Ishiguro and Leika Kihara

TOKYO, July 20 (BestGrowthStock) – Japan’s government said it would
stick to caps on spending and new bond issuance in the next
fiscal year, although meeting the targets is expected to be tough
given rising social welfare costs.

Credit agencies have warned of possible downgrades of Japan’s
debt rating as the ruling party’s loss in an upper house election
jeopardised efforts to rein in the country’s huge public debt.

Japan will keep new debt issuance from exceeding the current
year’s level of 44.3 trillion yen ($511 billion), Chief Cabinet
Secretary Yoshito Sengoku said after the government released a
budget outline for fiscal 2011/12, starting next April.

The outline says the government will aim to cap
general-account spending, which excludes debt servicing costs, at
around 71 trillion yen in 2011/12 to rein in bulging debt.

Sengoku said the government hoped to formalise the guidelines
by the end of July.

Based on the budget guidelines, government ministries will
submit their spending requests by the end of August, and a draft
annual budget is usually compiled by the end of the year.

Japan’s public debt — nearly twice the size of the $5
trillion economy — has long been financed domestically from the
country’s massive pool of savings that mostly sits in the banking
system and is recycled into JGBs.

But fears are growing that the ageing population will start
drawing on that pool of savings, forcing Japan to rely on foreign
investors to fund its debt and potentially creating market
instability.

The spending and bond issuance caps were part of a fiscal
framework the government agreed on last month to show investors
it will take steps to improve public finances after Europe’s
sovereign debt crisis pummelled financial markets.

But meeting them is easier said than done.

The government needs to come up with revenues to cover social
welfare costs which, due to an ageing society, increases by
roughly 1.3 trillion yen each year.

Some ruling party lawmakers are opposed to big cuts in
spending in some areas, citing the damage it could do to the
fragile economic recovery and the party’s popularity.

Prime Minister Naoto Kan has called on the need for fiscal
reform but the big loss of his party in upper house elections
earlier this month has reduced his clout in policymaking.

The ruling Democratic Party has a majority in the powerful
lower house but will need the support of other parties in passing
legislation through the upper house. That means Kan may need to
compromise to advocates of big spending.

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(Additional reporting by Tetsushi Kajimoto; Editing by Edwina
Gibbs)

UPDATE 1-Japan aims to keep spending, bond caps in 2011/12