UPDATE 2-Japan eyes spending cuts to meet budget goal

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

* Govt eyes 10 pct spending cuts to meet budget goal -Nikkei

* Aims to set 2011/12 budget ceiling by July 23 -Nikkei

* Credit rating agencies warn Japan after election

* IMF to release Japan’s Article 4 consultation this week
(Adds quote from Sengoku, details on IMF)

By Tetsushi Kajimoto

TOKYO, July 14 (BestGrowthStock) – Japan is looking to make broad
cuts in spending to meet a self-imposed cap in next fiscal year’s
budget, the Nikkei newspaper said, even as the ruling party’s
loss in an upper house election puts efforts to fix tattered
finances at risk.

Prime Minister Naoto Kan’s ruling coalition suffered a major
blow in Sunday’s upper chamber election, placing his policies to
deal with Japan’s huge debt at risk and prompting warnings from
credit ratings agencies of possible downgrades. [ID:nTOE66C03L]

The Democratic Party-led government will stick to its pledge
made before the election of capping general spending, which
includes payouts to local governments but excludes debt servicing
costs, at 71 trillion yen ($800 billion) for each of the coming
three years, the Nikkei said without citing sources.
[ID:nTFD006451]

The spending cap is part of a fiscal framework Japan’s
government agreed last month to show investors it will take steps
to improve public finances after Europe’s sovereign debt crisis
pummelled financial markets.

Finance Minister Yoshihiko Noda has reaffirmed his commitment
to the fiscal framework with Chief Cabinet Secretary Yoshito
Sengoku and the Democrat’s policy chief, but the election has
cast doubt over fiscal policy as the Democrats now need votes
from opposition parties to pass laws in the upper house.

“We decided on the fiscal framework on June 22 with an eye to
the global economy and financial market situations,” Sengoku told
reporters at a briefing.

“Compared to that time, tensions on the European situation
seem to have grown somewhat bigger. There has been an agreement
that we’ll set rules for budget request ceilings by sharing the
fiscal framework and growth strategy that won praise at the G20
meeting.”

An ageing society pushes up social welfare costs by about 1
trillion yen ($11.28 billion) each year, so in order to meet its
cap on general spending the government will seek to cut spending
in other areas by about 10 percent each in the budget for next
fiscal year, starting in April 2011, the Nikkei said.

The government hopes to redirect the money generated by the
spending cuts to areas with growth potential, the paper said. The
government also aims to set next fiscal year’s budget ceiling by
July 23, it said.

The International Monetary Fund (IMF) is scheduled to release
this week its annual assessment of Japan’s economy, which is part
of its Article 4 consultations with member states to promote a
stable global economy.

Japan should start with a modest increase in the 5 percent
sales tax from the fiscal year starting in April 2011 to restore
its public finances, according to a preliminary report the IMF
issued in May.

Japan should then increase the sales tax gradually to 15
percent or more over several years, because it will be difficult
to lower outstanding debt only with spending cuts, according to
the preliminary report. Japan should also consider ways to limit
rising social welfare costs, the IMF said.

In Japan, the government sets a ceiling for overall spending
in the next fiscal year’s budget in July. Government ministries
then submit their spending requests by the end of August, and a
draft annual budget is compiled by the end of the year.
($1=88.66 Yen)
(Editing by Michael Watson)

UPDATE 2-Japan eyes spending cuts to meet budget goal