Tokyo: Japan's government cannot keep relying on excessive bond issuance to fund fiscal spending, the finance minister warned yesterday, as ruling Democratic Party officials wrangle over spending for next fiscal year.
Japan is struggling to balance reining in its public debt with supporting growth and beating deflation, and the cabinet is expected to approve guidelines today for budget requests for the fiscal year starting next April.
Chief Cabinet Secretary Yoshito Sengoku told reporters the government would set aside more than 1 trillion yen (Dh40 billion) in the 2011-12 budget to support growth, less than the 2 trillion yen some in the party had asked for.
Sengoku also said ministries would have to make what he called spending cuts of 10 per cent, but later he made clear this would simply be a reallocation of spending to areas with growth potential.
Prime Minister Naoto Kan's government has already agreed to cap general spending next year at this year's level and to limit new bond issuance to 44.3 trillion yen. But the strength of this commitment has come into doubt after an upper house election defeat, which has left Prime Minister Naoto Kan's Democrats without enough seats to pass legislation on their own and has raised the spectre of party infighting.
Austerity measures
"The government will be forced to take austerity measures because of its fiscal position," said Akira Takei, general manager of international fixed-income investment at Mizuho Asset Management in Tokyo.
"If the government fails to do its job interest rates will rise and this would be the canary in the tunnel. This is a problem all major economies face."
Credit agencies have warned of possible downgrades to Japan's debt rating as the Democratic Party's loss in the upper house election jeopardised efforts to rein in the country's huge public debt.
Japan's public debt is nearly twice the size of its $5 trillion economy, the worst ratio among industrialised nations.
"Our finances are in the worst state compared with other developed countries and it is difficult to rely on bond issuance," Finance Minister Yoshihiko Noda said at a meeting of regional finance bureau chiefs.
"We must work to rebuild our finances."
Investors have become sensitive to public-sector finances after Greece obscured the size of its debts, which rattled confidence in other countries' debt burdens, sent bond yields soaring and pummeled the euro.
Anxiety remains
Japanese exports continued to rise in June on shipments to Asia but the pace of growth was the slowest this year amid signs that recovery may be losing steam as global demand falls, data showed yesterday.
"We previously saw a robust, V-shaped recovery in exports after the financial crisis. Now the speed of the recovery is tapering off," said Atsushi Kamio, economist at the Daiwa Research Institute.
However, the slowdown was less sharp than economists had expected.
Exports rose 27.7 per cent to 5.87 trillion yen ($67 billion), their seventh consecutive monthly rise, beating market expectations of a 23.1 per cent increase but still below May's rise of 32.1 per cent, the finance ministry said.
Imports jumped 26.1 per cent to 5.18 trillion yen, led by crude oil, liquefied natural gas and non-ferrous metals.
Strong demand for automobiles, high-tech products and factory parts have helped offset a weaker domestic picture, enabling Japan's biggest companies to bring about a tentative economic recovery.
But anxiety remains about the impact that the withdrawal of global stimulus measures and European debt will have on Japanese exports, with equipment and components makers also facing a knock-on effect from falling demand for Chinese goods.
