ANALYSIS: Lavish budget could lead Japan to fiscal crisis later

TOKYO, Dec. 20 Kyodo - Japan's Finance Ministry rolled out Saturday a record-high state budget for fiscal 2009 to buoy the faltering economy hit by the global downturn, but concerns are growing that an aggressive fiscal policy aimed at averting an immediate conomic disaster could cause the country to fall into fiscal crisis
later.

The ministry's 88.55 trillion yen draft budget clearly underlines the
government's pump-priming policy which it is pursuing almost in disregard of
fiscal discipline as the nation faces a major economic crisis.
Observers say such a stance could increase the possibility of an eventual
drastic hike in the nation's sales tax and interest rates on government bonds.
Tokyo's fiscal stimulus is in line with a global movement to tackle the
worsening global economic slump. But the country, whose fiscal position remains
the worst among major developed economies, naturally faces restrictions, says
Hideo Kumano, chief economist at the Dai-ichi Life Research Institute.
''It is all right if a person who does not have a cold dives into a swimming
pool, but a flu patient who jumps into the pool could be hospitalized,'' Kumano
said in alluding to Japan's fiscal situation.
He said the United States and Europe have more room to maneuver in terms of
stimulus measures backed by their fiscal conditions.
Kumano expressed wariness over Prime Minister Taro Aso's stance of sacrificing
fiscal reconstruction principles for stimulus measures, saying it would
escalate the outstanding amount of Japan's already heavy debts and cause a
sharp rise in the consumption tax rate from the current 5 percent.
Kazuhiko Nishizawa, senior economist at the Japan Research Institute, also said
the interest rates on Japanese government bonds could rise sharply in the
future, as domestic investors -- the main buyers of JGBs -- may shun them due
to expected dips in their saving levels in a rapidly aging society.
Nishizawa said he sees ''dead-end situations'' in Japan's attempts to improve
its fiscal health, as the country has slackened its efforts to realize a budget
surplus on a primary balance basis in fiscal 2011 only two years after
introducing the goal.
A surplus in the primary balance is achieved when expenditures, excluding
debt-servicing costs, are covered by revenues without relying on debt issuance.
The Cabinet of former Prime Minister Junichiro Koizumi, known as a reformer,
adopted the goal in 2006.
Nishizawa indicated that a commitment to fiscal tightening in the future would
be necessary even if a country temporarily concentrated on massive spending to
buttress its economy.
In that sense, he welcomed remarks by former U.S. Treasury Secretary Robert
Rubin that the United States needs to seek fiscal discipline in the medium
term. Rubin serves as an adviser to President-elect Barack Obama, who has
proposed a massive stimulus package involving infrastructure investment.
''After spending, Japan has virtually done nothing'' to indicate future fiscal
tightening, Nishizawa said. Both he and Kumano fear that public works projects
included in Aso's stimulus plans may not be fully scrutinized before
implementation and could turn out to be wasteful spending.
The ministry's draft budget shows the government's efforts to tap reserves in
special account budgets so as not to increase the amount of Japan's debts. But
Kumano said such a move can only produce ''euphoria'' because using money that
is originally kept to repay debts is tantamount to issuing new bonds.
After all, Japan's fiscal policy walks on a tightrope because of political
dysfunction, some economists pointed out.
The Aso government's support rate has plummeted to around 20 percent in recent
opinion polls, after the premier decided not to dissolve the House of
Representatives for a general election, which could possibly break the
political stalemate caused by the divided Diet.
''Fiscal reform cannot be achieved by a government whose support base has been
weakening,'' Kumano said. Politicians refrain from advocating a tax boost for
fear of losing voter support, he added.
At present, Aso is vowing to turn the Japanese economy around in three years
and raise the consumption tax after the recovery. But many see only a slim
chance of Aso's staying on as premier and realizing his pledge.
Kyohei Morita, chief economist at Barclays Capital Japan Ltd., said that before
an election, the government tends to focus on near-term economic policies to
win support and does not consider longer-term measures to boost the country's
growth potential.
''Over the long term, public investment in promising areas such as
environment-friendly cars and robots could be more effective than short-term
benefits to be brought about by a 2 trillion yen cash benefit program,'' Morita
said.
Aso's stimulus plan includes a program to distribute cash to the general public
to spur personal consumption.
Nishizawa said he cannot expect much from the main opposition Democratic Party
of Japan, which nowadays has more support in opinion polls than Aso's Liberal
Democratic Party, as the DPJ only presents a list of fiscal spending programs
and does not clearly explain how it would manage the increasing fiscal burden.
The DPJ, headed by Ichiro Ozawa, says it does not plan to raise the sales tax
for now. Ozawa has also vowed to provide parents with a 26,000 yen
child-rearing allowance per kid and financial support for farmers if the
opposition party takes power.
==Kyodo
2008-12-20 22:35:53