UPDATE 2-Japan eyes stricter spending rules to cap debt-Nikkei

* Japan to set 3-year spending cap in fiscal plan -Nikkei

* To require permanent fund source for new spending -Nikkei

* Govt hopes to finalise fiscal plan as early as Friday-Asahi
(Adds details, background)

By Leika Kihara

TOKYO, June 15 (BestGrowthStock) – Japan will adopt stricter fiscal
management rules that set a cap on state budgets and require
permanent funding sources for new policy steps in a fiscal reform
strategy due out this month, the Nikkei newspaper reported on

The government will also pledge in the plan to do its utmost
so that its new bond issuance in the year to March 2012 does not
exceed the record 44 trillion yen ($480 billion) earmarked for
this year, the paper said. It will not mention any bond issuance
cap for other years.

The government plans to lay out the medium- and long-term
fiscal targets before a G20 summit in Toronto next week.

Ratings agencies have threatened to cut Japan’s sovereign
debt rating unless it crafts a credible plan to rein in huge
public debt, which is nearly twice the size of its GDP.
More stories on Japan’s economy [ID:nECONJP]
Graphic on global govt debt: http://r.reuters.com/neh98h

New Prime Minister Naoto Kan, known as a fiscal conservative,
has warned that Japan risks defaulting on its borrowing if it
fails to rein in debt, and that fixing the country’s finances is
the biggest issue the government needs to tackle.

He has said the fiscal reform plan will include a goal of
bringing Japan’s primary budget balance — the balance excluding
revenue from bond sales and debt-servicing costs — into the
black within a decade. [ID:nTOE65D03E]

In the fiscal reform plan, the government will also set a cap
of around 71 trillion yen on expenditures, including policy
spending and payouts to regional governments, in each of the
three years from fiscal 2011/12, the Nikkei said.

The government hopes to finalise the framework at a cabinet
meeting as early as Friday, the Asahi newspaper said.

The plan will complement the government’s new economic
strategy, which calls for achieving real economic growth of at
least 2 percent by fiscal 2020. The growth strategy may also be
released on Friday, a senior government official said on Tuesday.

In the fiscal year that ended in March the economy shrank a
real 2.0 percent.

The official also said the strategy could include the idea of
creating a comprehensive exchange on which everything from stocks
to commodities could be traded.

Japan’s primary balance is in deficit to the tune of 33.5
trillion yen this fiscal year. That is equivalent to about 7
percent of gross domestic product.

There is no concern about Japan’s ability to fund its
deficits in the near term because of the country’s vast pool of
domestic savings.

But fears that this could change in the long term as the
ageing population starts drawing on savings have led to a rise in
demand for protection against the risk of default in Japanese
government bonds in the credit default swaps market.

($1=91.60 Yen)
(Additional reporting by Dinesh Mehta in Bangalore; Editing by
Michael Watson)

UPDATE 2-Japan eyes stricter spending rules to cap debt-Nikkei