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Wednesday, Dec. 16, 2009

Cabinet sets budget policy, including ¥44 trillion bond cap

Staff writer

The Cabinet of Prime Minister Yukio Hatoyama adopted on Tuesday a basic policy on compiling the fiscal 2010 budget, including a ¥44 trillion limit on issuing new bonds.

Deputy Prime Minister Naoto Kan said the ¥44 trillion cap underlines the administration's determination to spend aggressively to prop up the economy while preventing long-term interest rates from rising dramatically at the same time.

"Compared with other countries, conditions in Japan, including deflation, are very severe," Kan said.

The ¥44 trillion level has symbolic importance for the Hatoyama government because it had pledged to reduce the budget compared with the previous government led by the Liberal Democratic Party.

The government under the LDP's Taro Aso had planned to issue new government bonds worth ¥44 trillion after it compiled its first extra budget, which is why the DPJ government chose that figure for its target. But excluding the extra budget, Aso planned to issue only ¥33 trillion for fiscal 2009, and Hatoyama has already backed off from his pledge to cut spending.

Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co., said he believes the government will probably meet the ¥44 trillion bond cap by tapping ample nontax revenues, such as reserve funds in special accounts.

But he also warned that if the government fails to meet the ¥44 trillion target, it could push up the long-term interest rate and thereby hurt the economy through the ensuing reduction in both corporate and individual investment.

"The recent appreciation of the yen, deflation and a rise in the long-term interest rates would triple or quadruple the impact, negatively affecting" the economy, Muto said.

Senior Vice Finance Minister Yoshihiko Noda has indicated the government is trying to come up with around ¥10 trillion in nontax revenues for the next fiscal year, in addition to issuing up to ¥44 trillion in bonds.

However, the government still would not be able to fund all of the ministries' budgetary requests, which total a record ¥95 trillion, if next year's tax revenue remains around ¥37 trillion, the level projected for this fiscal year.

In the first six months of next year, the government plans to draw up a middle-term plan to structurally reduce government debt.

Hatoyama's government has been also criticized for lacking a middle or long-term plan to lower the ratio of the public debt to gross domestic product, a key benchmark for a country's overall credit confidence.

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The Japan Times

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