Japan’s government may need to issue more bonds or drop some spending plans as it faces a shortage of up to ¥7 trillion (US$78 billion) in funds in the year to March 2012, the Nikkei newspaper reported.
An increase in bond issuance would raise the spectre of a cut in Japan’s sovereign ratings as the national debt is nearing 200 percent of its gross domestic product, analysts say.
Fitch, Moody’s and Standard and Poor’s have all warned Japan it faces a ratings downgrade, which could raise the borrowing costs for the most indebted of the industrialized nations and rattle investors who are already nervous about Greece’s debt and the sovereign risk facing other European nations.
PHOTO: REUTERS
The Democratic Party-led government plans to issue a record ¥44 trillion in new bonds in the budget for the business year beginning next month.
It may need to issue even more in the following year from April 2011 as it faces a ¥6 trillion to ¥7 trillion fund shortage if it is to meet the party’s election pledges while tax revenues shrink, the Nikkei said without citing sources.
The government would have to cut spending, raise taxes or issue more new bonds to cover the shortfall, the paper said.
TOO GLOOMY?
The Nikkei said tax revenues were likely to fall to ¥42.6 trillion in 2011-2012 from an expected ¥48 trillion in the year from April 1, a forecast some economists said might be too gloomy and probably reflected a desire by finance ministry mandarins to pressure politicians to do more on fiscal reform.
The bond market didn’t react immediately to the Nikkei story. Benchmark 10-year JGB futures rose 0.11 point to 138.74 as investors worried about whether Europe will agree to support Greece sought safety in government debt in other countries.
FISCAL WOES
Still, traders and investors said Japan’s fiscal woes could push up bond yields in the long term as markets brace for a steadily increasing supply of new debt.
Some analysts are sanguine because Japanese household savings, totaling around US$15 trillion, are about the size of the US economy, and this money regularly flows into Japanese government debt.
“Japan has been able to run budget deficits for years, but that’s because high savings means households and the corporate sector finance the public sector,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.
“This is a worry in the long term, but in the short term it’s more of the same,” he said.
FRAMEWORK
The government will announce a long-term fiscal policy framework and a fiscal discipline target in June.
A legally binding framework is one possibility, Japanese Finance Minister Naoto Kan told lawmakers in the parliament yesterday.
Some investors and government officials worry that the fiscal framework could bring Japan closer to a downgrade if it does not include a credible plan to reduce the debt burden.
The government has faced calls from outspoken banking minister Shizuka Kamei, head of a small coalition party, for more spending to stimulate the fragile economy before an upper house election expected in July.
Japanese Prime Minister Yukio Hatoyama has rejected such calls, helping markets shrug off Kamei’s comments. Kamei’s push last year for big spending was also unsuccessful.
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