The government pledged Friday not to increase its new debt issuance over the next two years but failed to specify how to restore Japan's precarious fiscal health, with a decision yet to be made on the politically sensitive issue of a sales tax hike.
In an outline of its medium-term fiscal reform plan, presented at a meeting of the Council on Economic and Fiscal Policy, Prime Minister Shinzo Abe's administration also promised to reduce wasteful spending and allocate financial resources to prior policy measures, aiming to achieve its fiscal consolidation goal.
The outline, however, provided no details of how thorough expenditure cuts will be implemented.
The reform plan is expected to be hammered out next week, as Japan has been requested by the Group of 20 leading economies to map out a "credible" medium-term fiscal reform plan before their summit in St. Petersburg, Russia, from Sept. 5 to 6.
Abe has said he will make a final decision in the fall on whether to raise the sales tax to 8 percent from the current 5 percent in April next year, regarded as key to Japan's fiscal rehabilitation. There is growing concern that the nation's plan may not be seen as "credible" at the G-20 summit if the hike is not implemented.
"We'll express our strong intention to pursue fiscal consolidation at the summit," economic and fiscal policy minister Akira Amari told a press conference after the meeting.
As for the tax hike, Abe "will make a judgment while considering what will contribute to ending deflation, attaining economic growth and rebuilding the public finances," Amari said.
Abe's administration has committed to halving the ratio of the primary balance deficit to Japan's gross domestic product by fiscal 2015 from the level in fiscal 2010 and turning the balance into a surplus by fiscal 2020.
On the spending front, four private members of the key economic panel have called for the deficit in the general-account budget, which is likely to total around 23 trillion yen in fiscal 2013, to be slashed to about 15 trillion yen in fiscal 2015.
A deficit in the balance means the country cannot finance government spending other than debt-servicing costs without issuing new bonds. An improvement in the balance is viewed as the critical first step toward fiscal reconstruction.
At the meeting Friday, the government also presented its guidelines for the compilation of an initial budget for the next fiscal year.
Abe's administration asked all ministries and agencies to cut spending for public works projects by 10 percent from the previous fiscal year, while setting special reserves in the budget to promote its economic growth strategy.
The Finance Ministry will allow the ministries and agencies to make budget requests related to the strategy of up to 3.5 trillion yen. After Abe decides whether to implement the tax hike, the ministry will screen the requests in order to eventually earmark special reserves of 1 trillion yen in the initial budget for fiscal 2014.
The guidelines are slated to be approved by Abe's Cabinet next week.
Fiscal rehabilitation is one of the key challenges Abe is facing, as the world's third-largest economy has been recovering on the back of his policies dubbed "Abenomics," entailing drastic monetary easing, massive fiscal spending and a growth strategy aimed at bolstering private-sector investment.
Japan's fiscal health is the worst among major developed economies, with its public debt level at more than 200 percent of GDP.
If concern intensifies over the nation's fiscal discipline, it could prod investors to sell Japanese government bonds and trigger a surge in long-term interest rates, which would weigh on domestic demand with mortgage rates and corporate borrowing costs increasing, some analysts said.
The sales tax rate is scheduled to be finally lifted to 10 percent by October 2015 to cover swelling social security costs at a time when Japan's population is aging.