The government of Prime Minister Shinzo Abe and ruling parties pledged Wednesday to restore Japan's ailing public finances, confirming that promoting fiscal rehabilitation is essential to maintain economic growth.
In a final draft of a mid-term fiscal reform plan, the Abe administration also agreed with the Liberal Democratic Party and its coalition partner the New Komeito party to place top priority on conquering nearly two decades of deflation.
To prevent prices from continuously falling, the government and ruling parties promised in the draft that they would "carry out flexible fiscal policy" if Japan faces a serious economic crisis.
"We have to boldly streamline the budget and prioritize budget allocation by mapping out a credible mid-term fiscal plan, to ensure people's security and the country's credibility," Abe said during a meeting of government and ruling party leaders.
At the meeting, guidelines for the compilation of an initial budget for the next fiscal year were also discussed.
The guidelines and the mid-term fiscal reconstruction plan are slated to be signed by the Cabinet on Thursday.
In the fiscal plan, the government will pledge not to increase its new debt issuance over the next two years, based on the view that concern over the country's fiscal health, the worst among developed nations, hampers consumer spending and business investment.
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.
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 rehabilitation.
To achieve the goal, the government intends to promise in the fiscal plan to secure financial resources for social security programs through reform both on the revenue and expenditure sides.
But Abe's administration has yet to decide whether to raise the sales tax to 8 percent from the current 5 percent in April 2014, though the tax hike is regarded by some analysts and international economic organizations as key to Japan's fiscal reconstruction.
The premier has said he will make a final judgment on the tax matter in the fall, while closely monitoring economic data and the possible effects of the tax hike on the economy.
The consumption tax rate is scheduled to be lifted to 10 percent by October 2015 to cover swelling social security costs at a time when Japan's population is aging.
Japan's fiscal health is the worst among major developed economies, with its public debt level at more than 200 percent of GDP.