Gov't OKs medium-term fiscal reform plan, but offers no specifics

The government approved a medium-term fiscal reform plan Thursday, pledging to narrow Japan's budget deficit by 17 trillion yen over the next two years, but offered no specifics on how to improve public finances with a decision yet to be made on a sales tax hike.

Prime Minister Shinzo Abe's administration also promised to avoid increasing its new debt issuance during the same period, reduce wasteful spending and allocate financial resources to prior policy measures, with an eye on beating nearly two decades of deflation.

"The medium-term fiscal plan shows how we will achieve a fiscal consolidation target, while aiming for a virtuous cycle of economic revitalization and fiscal soundness," Abe said during a meeting of the Council on Economic and Fiscal Policy.

The plan, however, provided no details of how to cut expenditure and boost revenues, analysts say, though Japan has been urged by the Group of 20 economies to map out a "credible" medium-term fiscal reform plan before their summit in St. Petersburg, Russia, on Sept. 5 and 6.

Fears are growing that the country's newly crafted plan, which is not premised on the tax hike, may not be seen as "credible" at the G-20 summit and that Japan's intention to restore its fiscal health could be called into question in the international arena.

"I believe we can prove our eagerness to balance our budget" at the G-20 summit by explaining the medium-term plan, Finance Minister Taro Aso told a press conference.

Abe's Cabinet plans to revisit the fiscal plan and formally endorse it in the autumn, following a final judgment on the planned April tax hike.

The consumption tax hike is regarded by some international economic organizations as key to Japan's fiscal rehabilitation. The government said in the plan that it will decide whether to raise the tax rate to 8 percent from the current 5 percent next April as legislated, while "comprehensively taking economic conditions into consideration."

Abe instructed the government the same day to launch a panel of experts to assess the possible impact on the country's economy of the tax measure, the first round of a two-stage increase to 10 percent by October 2015 to cover swelling social security costs at a time when Japan's population is aging.

On the spending front, Japan will slash the combined total of budget deficit for both central and local governments -- which is likely to total around 34 trillion yen in fiscal 2013 -- to about 17 trillion yen in fiscal 2015.

The reduction of the budget shortfall is required for Abe's Cabinet to attain its goal of halving the ratio of the primary balance deficit to the nation's gross domestic product by fiscal 2015 from the fiscal 2010 level.

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.

Abe's administration has also pledged to turn the primary balance into a surplus by fiscal 2020, but the latest government estimate, also released Thursday, indicates Japan cannot accomplish it even if the planned consumption tax hikes are carried out and the economy is on a firm growth path.

Under an optimistic scenario in which the economy would expand by an average of 3.0 percent in nominal terms over the next decade from fiscal 2013, the primary revenue deficit would be 2.0 percent in fiscal 2020, the Cabinet Office said.

The projection suggests that Abe's government should make more of an effort to put Japan's fiscal house in order by taking measures such as drastic cuts in social security payments and further tax hikes.

Fiscal consolidation is one of the significant challenges Abe is facing, as the world's third-largest economy has been recovering on the back of his stimulus dubbed "Abenomics," entailing aggressive 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 prompt investors to let go of Japanese government bonds and trigger a surge in long-term interest rates that would drag down domestic demand with mortgage rates and corporate borrowing costs increasing, some analysts said.

The government also approved Thursday its guidelines for the compilation of budget for the next fiscal year, which will start April 2014.

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 growth strategy.

To accelerate rebuilding of areas ravaged by the March 2011 earthquake and tsunami, the government decided not to put a ceiling on fiscal 2014 budgetary requests for reconstruction work, according to the guidelines.