Japan will aim to keep its ceiling for new borrowing unchanged next fiscal year, the government said today, as the debt crisis engulfing the euro zone and the US credit downgrade flash warning lights for the heavily indebted government.
The government also slashed its economic growth forecast for the current fiscal year to reflect a slump in factory output following the March 11th earthquake but expects a strong rebound in the following year.
It maintained ceilings on new debt issuance and spending in an annual review of its mid-term fiscal plan spanning three years. Tokyo has vowed to balance its budget excluding debt-servicing by the fiscal year to March 2021 as a long-term goal.
Finance minister Yoshihiko Noda has said Japan would be in a tight spot if its public finances came under scrutiny because of he debt crises in Europe and the United States.
"Japan faces an emergency as public debt has continued to rise," the government said in the medium-term fiscal plan.
"We need to proceed steadily to achieve fiscal reform targets in order to maintain trust in government bonds."
Japan is grappling with a public debt that is about twice the size of its $5 trillion economy, by far the worst ratio among industrial countries.
The government pledged to cap new bond issuance at about 44 trillion yen ($573 billion) in fiscal 2012/13, starting next April 1st, and general spending excluding debt servicing at 71 trillion yen in the coming three fiscal years, both the same amount as earmarked in the current fiscal year to next March 31st.
But the targets exclude reconstruction bonds worth some 10 trillion yen that the government aims to issue to rebuild areas devastated by the earthquake and tsunami and to repay it through tax hikes over the coming decade.
The amount of new debt issuance already accounts for nearly 40 per cent of the 92.4 trillion yen state annual budget for the current fiscal year because of sluggish tax revenues.
The government also pledged "to act flexibly in its fiscal policy if economic risks stemming from the March disaster materialise."
It cut its economic growth forecast for the current fiscal year to 0.5 per cent from 1.5 per cent, bringing it in line with the Bank of Japan's 0.4 percent forecast made last month.
Japan's recovery from the March disaster faces growing risks from an uncertain global economic outlook and a rising yen, the cabinet said. Nevertheless, the government expects the economy to grow between 2.7 per cent to 2.9 per cent next fiscal year, depending on how quickly it spends money to rebuild areas on the northeast coast devastated by the March disaster.
The BOJ expects economic growth to pick up to 2.9 per cent in fiscal 2012/13.
Japan faces the challenge of combining the push to pare its mounting public debt with spending vast sums as it rebuilds.
The Cabinet Office suggested that a plan to double the 5 per cent sales tax by the middle of the decade may not be ambitious enough to achieve the long-term deficit reduction targets.
Even if the government raises the sales tax as planned, it would have an 18 trillion yen primary budget deficit in fiscal 2020, according to Cabinet Office calculations, well short of the government's goal of a primary budget surplus.
A budget has a primary balance when spending equals revenues excluding debt servicing costs and income from bond sales.