WRAPUP 2-Japan aims to cap 2011/12 spending, new bonds

* Government under pressure to rein in public debt

* Aims to cap spending, new bond issuance in next budget

* Budget to prioritise growth areas, campaign pledges

* Analysts worry budget process messy, leadership weak

By Rie Ishiguro and Leika Kihara

TOKYO, July 20 (BestGrowthStock) – Japan’s government said on
Tuesday it would cap spending and new bond issuance in next
year’s budget at this year’s levels, although hitting the
targets could be tough given rising social welfare costs and a
wounded political leadership.

Credit agencies have warned of possible downgrades of
Japan’s debt rating after a thrashing for the ruling Democratic
Party of Japan (DPJ) in an upper house election this month
jeopardised its efforts to rein in the country’s budget
deficit.

Although the gap of 8.7 percent of GDP is modest compared
with the United States and some European countries following
the global financial crisis, Japan’s overall public debt is the
equivalent of twice the $5 trillion economy — by far the
biggest in the developed world.

Chief Cabinet Secretary Yoshito Sengoku said Japan would
keep new debt issuance in the fiscal year from April 2011 from
exceeding the current year’s 44.3 trillion yen ($511 billion).

In an outline of the budget for 2011/12, the government
said it aimed to limit spending, excluding debt servicing
costs, at around 71 trillion yen — about the same level as
this year.
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Graphic on Japan’s public debt: http://r.reuters.com/sez92m

Q+A-Can Japan keep spending, JGB cap pledges
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IMF urges Japan to act soon to rein in debt [ID:nN14149547]

More stories on Japanese politics: [ID:nPOLJP]

More stories on the Japanese economy [ID:nECONJP]
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The government hopes to produce more detailed guidelines
for ministries by the end of July, with Prime Minister Naoto
Kan, Sengoku and DPJ policy chief Koichiro Genba, who is also a
cabinet minister, taking the lead in cooperation with Finance
Minister Yoshihiko Noda, the chief cabinet secretary said.

“The government’s stance towards keeping new bond issuance
for the next fiscal year at 44.3 trillion is not an unrealistic
goal. More importantly, it is a target that needs to be met as
the (bond) market has been pricing in that target being met,”
said Tetsuya Miura, chief market analyst, at Mizuho Securities.

“But the task ahead … appears to be a tough one, and it
may have to double its efforts to curb spending.”

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

LEADERSHIP AT THE TOP?

Sengoku also said spending would focus on sectors targetted
in a growth strategy unveiled last month, such as environment
and health care, along with pledges in the ruling party’s
platform.

But some analysts worry the budget process could be rocky
this year after the Democrats and a tiny ally lost their upper
house majority in the July 11 election.

Voters handed the Democrats a stinging setback after Kan
floated a possible doubling of Japan’s 5 percent sales tax and
failed to persuade the public that he had a well-crafted plan
for curing Japan’s deep-seated economic woes.

The DPJ has a majority in the powerful lower house but
needs the support of other parties to pass bills in the upper
house, including laws to implement the budget, and has to fend
off Kan’s critics inside the party, who may press for more
spending.

That could trap the government between a rock and a hard
place.

The main opposition Liberal Democratic Party (LDP), for
example, has said the Democrats must drop campaign pledges such
as payouts for farming households and child allowances for
parents that the LDP considers wasteful pork-barrel spending.

“The key thing is there has to be someone at the top making
decisions and prioritising and that has to be the prime
minister,” said Robert Feldman, chief economist at Morgan
Stanley MUFG Securities in Tokyo.

“But will this process allow that kind of leadership?” he
queried, noting a National Strategy Bureau set up last year to
oversee the budget process had been demoted to an advisory
body. “It is not clear that the process will go smoothly.”

Most developed nations built up hefty budget deficits
during the global financial crisis to support their economies
during the downturn. The U.S. deficit is forecast at 10.6
percent of GDP for 2010.

But Japan’s huge public debt burden, built up during two
decades of economic stagnation, makes it difficult to reduce
its budget deficit because of the debt it has to service.

Interest payments and redemptions on the debt take up about
20 percent of each year’s budget. Total spending for the
current fiscal year is projected at a record 92.3 trillion yen,
of which only 37.4 trillion yen is covered by tax revenues.

Japan plans to issue 144.3 trillion yen in government bonds
to the market this fiscal year, including bonds issued for new
borrowing and refunding bonds.

Its public debt has long been financed domestically from
the country’s massive pool of savings that mostly sits in the
banking system and is recycled into Japanese government bonds.

But fears are growing that an ageing population will start
drawing on their savings, forcing Japan to rely more on foreign
investors to fund its debt and potentially destabilising
markets.

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.

Meeting the targets would be difficult even without the
election setback for Kan and his party, since the government
needs to come up with revenues to cover social welfare costs
which, due to an ageing society, increase by roughly 1.3
trillion yen each year.
Stock Market Today

($1=86.76 Yen)
(Additional reporting by Tetsushi Kajimoto and Shinichi
Saoshiro; Writing by Linda Sieg; Editing by Neil Fullick)

WRAPUP 2-Japan aims to cap 2011/12 spending, new bonds