The Nikkei newspaper said revenues would be ¥7trn ($78bn) short in 2011/12 if the government keeps its campaign promises and tax revenues fall by an estimated ¥5.4trn due to a sluggish economy.
Can the ruling party break its promises?
The main ruling Democratic Party of Japan (DPJ) trounced the long-dominant Liberal Democratic Party (LDP) in a lower house election last year on a platform promising to put more money in the hands of consumers to spur domestic growth.
The party is aiming to firm up by end-May its manifesto for an upper house poll expected in July that the DPJ needs to win to avoid relying on small coalition partners or even a parliamentary deadlock. It has a majority in the lower house, but the upper chamber can delay bills.
With Prime Minister Yukio Hatoyama’s ratings sinking to near 30 percent in some surveys and the gap between the Democrats and the LDP narrowing, some analysts say the DPJ is unlikely to make major changes in its platform ahead of the upper house election.
The government has already dropped a plan to end a decades-old gasoline surcharge, citing lack of funds, and other analysts say voters would accept some changes given their own concerns about Japan’s huge public debt, which is almost twice the size of the economy.
Keeping the manifesto vague to allow room for changes after the election is also possible.
Will cutting wasteful spending help?
The government is preparing for a second round of exercises to cut wasteful spending, this time by targetting government-funded agencies that became symbols of wasted taxes under the LDP.
But Administrative Reform Minister Yukio Edano has already admitted the savings are likely to be slim. The Nikkei said total annual spending on targetted entities averaged around ¥2.6trn, a small amount compared with spending in the 2010/11 budget of ¥92trn.
The government is tapping non-tax revenues stashed in special accounts to help fund the 2010/11 budget but economists say such reserves are drying up.
Can the government raise taxes?
Economists agree Japan needs to raise its five percent sales tax to cope with the swelling social security costs of a fast-ageing population.
But that is unlikely to offer a solution for 2011/12 since Hatoyama has pledged not to raise the tax at least until the next general election, mandated by late 2013.
The government could also broaden the income and corporate tax base, but with the Democratic Party dependent on labour unions for votes, the scope for increasing revenues this way is limited.
Hatoyama and his cabinet ministers have also said they want to consider lowering the corporate tax rate, which at around 40 percent is one of the highest among major economies.
Could it issue yet more government bonds?
Ratings agencies have warned that Japan risks a downgrade if the government fails to draw up convincing plans to reduce its deficit and debt.
Markets have tended to shrug off previous downgrades and the same would likely hold true if new bond issuance above the record ¥44trn for 2010/11 prompted ratings agencies to act.
Recent warnings about Japan’s huge debt have failed to alter domestic institutional investors’ appetite for Japanese government bonds (JGBs) or reluctance to buy foreign assets.
Domestic investors, who hold 95 percent of JGBs, are unlikely to feel an urgent need to diversify, since deflation reduces the allure of other investment tools and helps keep household savings rates high.
Many analysts say that private-sector savings will eventually decline to an amount smaller than the national annual fiscal deficit and this may trigger a sell-off in JGBs. But such an upheaval is unlikely at least for the next few years, they say.
The benchmark 10-year yield stands at 1.350 percent, about half the level of comparable US Treasury yields, having been stuck below two percent for more than a decade due to deflation and near zero short-term rates.
Some analysts say the government may try to cap bond yields by asking the Bank of Japan to increase its JGB purchases from the current ¥21.6trn per year. However, Finance Minister Naoto Kan has repeated that he has no intention of asking the central bank to underwrite government debt.
What’s the real problem?
What Japan really needs is a credible plan to spur growth in the face of an ageing and shrinking population and proposals to convince financial markets it is serious about reining in the considerable amount of public debt.
The government said in December it aimed for annual economic growth of more than two percent over the next decade and will flesh out a strategy for achieving that in June, when it is also expected to unveil how it will rein in its fiscal deficit longer term.
But many economists are sceptical about the likelihood for credible plans, partly because of the government’s reluctance to raise tax and following its election pledges to spend more.
“I think the credibility of the current Japanese government in fiscal and economic policies is very weak,” said Takuji Okubo, chief economist at Societe Generale in Tokyo.
“They don’t have a clear idea of how to soft-land the fiscal problem or rebuild the growth outlook of Japan.”
