WRAPUP 2-Japan govt meets budget targets but faces hurdles

* Japan drafts record Y92.4 trln budget for 2011/12

* Manages to stick to new JGB issuance cap at 44.3 trln yen

* Initial budget’s new JGB issues top tax revenue for 2nd yr

* Noda calls for tax reform to overcome ‘abnormal’ situation

* Split parliament clouds outlook for budget implementation
(Adds finance minister quotes, graphic link, details)

By Tetsushi Kajimoto and Rie Ishiguro

TOKYO, Dec 24 (BestGrowthStock) – Japan’s government approved a
record 92.4 trillion yen ($1.1 trillion) draft budget on Friday
for the year from next April, keeping its self-imposed cap on
new debt but it faces a tough road ahead to fix its tattered
public finances.

With new debt issuance seen topping tax revenues for the
second straight year in the initial budget, Finance Minister
Yoshihiko Noda reiterated the need to overhaul the country’s tax
systems — code for a sales tax hike — to meet rising welfare
costs for the fast-ageing population.

“Tax revenues are approaching levels of new bond issuance
but this situation is abnormal and it is hard to steer finances,
so we must escape from this situation,” Noda told reporters.

“We need to thoroughly explain the need to respond to rising
welfare costs and that we cannot avoid a tax overhaul if we are
to secure a sense of future security.”

Noda added that he hoped the 2011/12 budget, which was
approved by the cabinet, would also help to boost the flagging
economy and job market to pull Japan out of deflation.

But a divided parliament clouds the outlook for its
implementation, creating an additional headache for Prime
Minister Naoto Kan as he confronts low voter support and a
bitter feud inside his ruling party over scandal-plagued
powerbroker Ichiro Ozawa.

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Graphic on Japan fiscal pain http://link.reuters.com/qad63r

Japan’s fiscal discipline challenges [ID:nTOE6BC00J]

Key points on Japan’s budget [ID:nTOE6BN053]

Party feuds distract from policy challenges [ID:nTOE6BL027]

More stories on the Japanese economy [ID:nECONJP]

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The first budget compiled by the Democratic Party-led
government from scratch keeps new borrowing at 44.3 trillion
yen, in line with its promise to limit fresh debt to this year’s
level. [ID:nTWKONE66I]

The government also adhered to a self-imposed cap on
spending, excluding debt servicing, at this year’s level around
71 trillion yen, aiming to rein in a public debt that is about
twice the size of Japan’s $5 trillion economy.

SPLIT PARLIAMENT

The budget is almost certain to be enacted, since the ruling
Democratic Party of Japan (DPJ) controls parliament’s powerful
lower house and the budget would take effect even if rejected by
the opposition-controlled upper chamber.

But passage of bills needed to implement and fund the
spending, such as one on issuing deficit-financing bonds, is far
from certain as they need approval by both houses of parliament.
Without such enabling bills, the government could not secure 44
percent of its budget revenues, finance ministry officials said.

“Market players are well aware of risks such as a delay in
parliamentary deliberations on the budget,” said Takahide
Kiuchi, chief economist at Nomura Securities.

“Although opposition parties are unlikely to take the budget
hostage for fear of public criticism, they could win concessions
such as resignation of the entire cabinet in return for passage
of budget bills.”

The Liberal Democratic Party, the main opposition party,
wants the government to drop some of its key campaign pledges
including payments to families with children, while the
government has scaled back such spending plans due to a lack of
revenue.

Tax revenues, seen at 40.9 trillion yen, will fall short of
new bond issues for a second straight year on an initial budget
basis, even as they increased 3.5 trillion yen from this year
with the economy’s recovery from a deep recession.

To balance the record budget, the cash-strapped government
scraped together 7.2 trillion yen of non-tax revenues, the bulk
of it by raiding cash reserves from its special accounts and
administrative agencies.

Government officials say non-tax revenues are a near-term
solution and it will be even harder to compile budgets from next
year onwards without a consumption tax hike or deep spending
cuts, as welfare costs rise for the fast-ageing population.

The government says it will seek to implement comprehensive
tax reform in the 2012/13 fiscal year but it could face stiff
resistance from ruling party lawmakers wary of alienating
voters.

Japan’s public debt is expected to reach 891 trillion yen,
or 184 percent of GDP, at the end of March 2012, the finance
ministry said, the highest among developed nations.
($1=82.96 Yen)
(Additional reporting by Linda Sieg; Editing by Edmund Klamann)

WRAPUP 2-Japan govt meets budget targets but faces hurdles