UPDATE 1-Japan caps spending, JGBs but faces challenges

* Govt ministries will submit budget proposals next month

* Japan ruling party weakened after election loss

* Govt aiming for fiscal discipline without harming growth

(Adds Noda’s quotes, analyst’s quotes)

By Tetsushi Kajimoto

TOKYO, July 27 (BestGrowthStock) – Japan vowed to cap spending and
new bond issuance for the next fiscal year at this year’s levels
in budget guidelines set on Tuesday, in an effort to fix its
tattered finances, but some analysts doubted the targets would
be met.

Under the guidelines approved by cabinet, the government
aims to keep general spending excluding debt-servicing costs at
71 trillion yen ($816 billion) and cap new bond issuance at
around 44 trillion yen, both the same as the current year.

But for the targets to be met, the ruling Democratic Party
of Japan (DPJ) may need to roll back some of its spending plans,
such as payouts to households with children.

The cap on new debt issuance may be breached as the
government struggles to finance rising social welfare costs and
dwindling tax revenues, some analysts say.

These will pose as further challenges to Prime Minister
Naoto Kan’s resolve for fiscal reform after his party’s loss at
the July 11 upper house election where Kan made raising the
sales tax a central issue. The defeat at the polls prompted
threats of a credit downgrade by rating agencies.
[ID:nTOE66C03L]

“People in the market see that it will be difficult to keep
the 44.3 trillion yen bond issuance amount,” said Satoshi
Yamada, general manager for fixed income management at Okasan
Asset Management.

“But the market has not yet started to factor that in as it
is waiting for more details on the budget to come out later this
year. The outlook of a discussion about a consumption tax is
uncertain at the moment.”

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Graphic on Japan’s debt woes http://r.reuters.com/sez92m

Q+A-Can Japan keep spending, JGB cap pledges [ID:nTOE66Q01V]

Factbox on ratings agencies’ warnings [ID:nTOE66C03G]

More stories on Japan’s economy [ID:nECONJP]

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Japan is saddled with public debt that is nearly twice the
size of its $5 trillion economy.

Its public debt has long been financed domestically from its
massive pool of savings, helping keep bond yields well below
equivalent yields in the United States. Fears are growing,
however, that an ageing population will start drawing on
savings, forcing Japan to rely more on foreign investors to fund
its debt and potentially destabilising markets.

Based on the guidelines, ministries will submit spending
requests by the end of August, with a draft budget expected to
be compiled by December. Last year such guidelines were not set,
leading to record spending requests for this year’s budget.

“These guidelines aren’t simply a ceiling,” Finance Minister
Yoshihiko Noda told reporters at a briefing.

“This is a framework for each ministry to prioritise and
re-allocate its spending. It is possible for spending cuts in
some areas to be used to offset welfare spending.”

Under the guidelines, the government will set aside more
than 1 trillion yen to fund measures to spur growth, although
the ruling Democratic Party of Japan had demanded 2 trillion yen
for such spending.

To fund this, the guidelines called on all ministries to cut
their discretionary spending plans by 10 percent. The request
was included despite opposition from some in the ruling party
and even within the cabinet.

The government added a phrase in the guidelines that was not
in an earlier version of the plan in order to give itself some
leeway on the timeframe for its spending plans.

But analysts say that unless the Democrats abandon some of
their campaign pledges, it will be difficult to limit spending.
Stock Today

(With reporting by Stanley White and Kaori Kaneko in Tokyo;
Editing by Kazunori Takada, Charlotte Cooper, Ron Askew)
($1=86.96 Yen)

UPDATE 1-Japan caps spending, JGBs but faces challenges