TOKYO: Japan’s government has managed to keep new bond issuances virtually unchanged despite signing off on a record 97.45 trillion yen ($831 billion) draft budget for fiscal 2017. The problem is that the plan rests on several assumptions and, due to a lack of structural reforms, a couple of crutches: the weaker yen and superlow interest rates. The government has portrayed the new budget as a move toward both economic recovery and better fiscal health. Its outline is peppered with feel-good promises, such as better conditions for child care workers, more research funding, a 500 billion yen cap on increases in social security costs caused by an aging population, and even a 0.2% decrease in the issuance of new Japanese government bonds.
One of the central assumptions is that tax revenue will increase. The government’s income is expected to fall 1.7 trillion yen short of projections for the fiscal year ending in March, due to sluggish corporate earnings caused by a relatively strong yen. Prime Minister Shinzo Abe’s team is banking on a recovery in fiscal 2017, with U.S. President-elect Donald Trump’s policies providing a tailwind, but it seems unlikely that revenue will simply grow in a straight line. The government does stand to save quite a bit as a result of the Bank of Japan’s negative interest rates and yield target of around zero for 10-year JGBs. The government expects to pay interest of just 1.1% next fiscal year on its debt, saving some 500 billion yen. Without the central bank’s efforts, the debt would swell further.