Japan Targets Balanced Budget by 2020 to Contain Debt

June 22 (Bloomberg) -- Japan’s government pledged to balance its books in 10 years, restrict bond sales and overhaul the tax system as part of a plan to contain the world’s largest public debt.

Annual spending will be capped at 71 trillion yen ($781 billion) over the next three years, the government said in its fiscal strategy released in Tokyo today. It will decide changes to the tax regime “soon.” Prime Minister Naoto Kan, who took office this month pledging to restore fiscal health, is exploring an increase in the country’s 5 percent sales tax.

The document represents the ruling Democratic Party of Japan’s conversion to deficit reduction as Europe’s fiscal crisis prompts a shift in public perceptions on the need to rein in a record 883 trillion yen of debt. Fitch Ratings said yesterday the plan must be “credible” to avoid risking the country’s AA- credit rating.

“The government deserves recognition for setting up concrete targets,” said Susumu Kato, chief economist for Japan at Credit Agricole CIB and CLSA in Tokyo. “But the focus will be on the feasibility of the plan -- how the government will act to achieve the goals.”

Borrowing costs in Japan have remained contained this year even as those among Europe’s most indebted nations surged, in part because 94 percent of investors in the country’s debt are domestic. Japan’s 10-year bond yielded 1.21 percent at 12:40 p.m. in Tokyo.

‘Pay As You Go’

The strategy calls for balancing the budget, excluding interest payments on bonds, by the year ending March 2021. Ministries will follow a “pay-as-you-go” principle when compiling the budget, meaning policy makers must secure funds before seeking extra spending. New bond sales will be kept within the current period’s 44.3 trillion yen next fiscal year and beyond, the plan said, without specifying how long.

Finance Minister Yoshihiko Noda told reporters in Tokyo today that the government will achieve the targets “by conducting reforms of spending and revenue.” National Strategy Minister Satoshi Arai said the plan will restore investor confidence.

Rising debt-servicing costs mean achieving a balanced budget isn’t enough and a primary surplus of 4 percent of gross domestic product is required, according to Chuo University Professor Toshiki Tomita. The Cabinet Office estimates a deficit of 6.4 percent in the year ending March 31.

Find Money

Japan will need to find as much as 7 trillion yen each year to achieve the limits on bond sales and spending, probably through an increase in taxes, Tomita, who advised the government on the plan, said in an interview last week. Bond sales would otherwise balloon to 50 trillion yen, he said.

A private-sector panel that advises the Finance Ministry today said the government should consider raising taxes on goods and services as well as high-income earners.

The DPJ last week called for cross-party talks over raising the sales tax, as part of its policy platform for a July 11 upper-house election. Kan said he will consider the opposition Liberal Democratic Party’s proposal to double the tax to 10 percent. Yesterday he said it will probably take “at least two to three years” to raise the levy.

Some 48 percent of voters support an increase in the sales tax to 10 percent, according to a Yomiuri newspaper survey published today. The Finance Ministry estimates a 1 percentage point increase would generate revenue of about 2.5 trillion yen.

Get Working

“We have to get working right away,” Kan said in his inaugural policy address on June 11. “We can see from the euro-zone confusion that began in Greece that our finances can go bankrupt if we don’t address our rising public debt.”

Japan racked up the debt as it tried to spend its way out of economic stagnation and deflation following the bursting of an asset-price bubble 20 years ago. Borrowings are approaching 200 percent of GDP, the highest ratio in the Organization for Economic Cooperation and Development.

Today’s strategy comes less than a week after the government released a plan to end deflation and achieve faster growth. Kan aims for 2 percent annual growth over the next 10 years, a rate that exceeds the 1.1 percent average expansion since 1990, by lowering corporate tax and nurturing business in areas such as the environment and health care.

“The fiscal reform plan remains a pie in the sky until they can detail credible measures to achieve higher economic growth, which is the other side of the coin of rehabilitating public finances,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo.

Faster Growth

The Cabinet Office today raised its economic growth forecast for the year ending March 31 to 2.6 percent from 1.4 percent predicted in December, as spending by companies and households picks up and exports grow. That would be the biggest expansion in 10 years.

Koji Miyahara, president of the Japanese Shipowners’ Association, said last week that corporate tax rates must be cut to make firms more competitive. “We must think of this as a complement to raising the sales tax,” said Miyahara, who is chairman of Nippon Yusen K.K., Japan’s biggest shipping line.

Debt-rating companies have been anticipating today’s release to gauge policy makers’ commitment to deficit reduction. Standard & Poor’s cut the outlook on Japan’s AA grade in January, citing diminishing “flexibility” to cope with the nation’s swelling debt load.

The next two months will reveal how willing politicians and voters are to returning Japan to fiscal health, Andrew Colquhoun, director at Fitch’s Asia-Pacific sovereign group, said in an interview in Tokyo yesterday. “The intention is there, but it remains to be seen how strong the consensus is.”