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Hatoyama Proposes Record $1 Trillion Budget

The proposal for the fiscal year that starts April 1, released on Friday in Tokyo, said the government will sell 44.3 trillion yen of new debt to help fund a revenue shortfall.

Hatoyama’s budget, the first since his Democratic Party of Japan took office in September, reflects campaign promises to address economic stagnation by lifting the spending power of the nation’s households. Economists have criticised the plans for deepening concerns about the nation’s indebtedness and failing to address regulatory constraints on businesses.

“It’s impossible to keep tolerating this massive spending,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal health will continue to be exceedingly severe given revenue won’t grow and a stagnant recovery may require additional economic measures.”

The extra yield, or spread, on 30-year government bonds over two-year notes was at 2.11 percentage point on Friday in Tokyo. The level is near a four-year high, reflecting concerns about the government’s debt management.

The budget gap has already increased to the equivalent of 10.5 per cent of gross domestic product this year from 2.5 per cent two years ago, according to International Monetary Fund estimates released last month.

Bonds and note sales to the market will swell to a record 144.3 trillion yen, according to the proposal, lower than the 145 trillion yen median estimate of 15 primary dealers surveyed by Bloomberg News.

“The government will need to be careful about maintaining fiscal discipline or some investors may start to think government finances are heading for a collapse,” Minami said.

Japan’s expanding deficit forced the DPJ to pare back some campaign promises this week. Hatoyama abandoned plans to end a provisional gasoline tax, securing about 2.5 trillion yen.

The premier also cut about 3 trillion yen off the unprecedented 95 trillion yen in budget requests he received from ministries, restraint that analysts including Hideo Kumano say indicates he doesn’t want to lose control of the government’s finances.

“Some people have been critical of the DPJ’s change of heart,” said Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official. “But it is a sign they are now steering along a more realistic course.”

Spending on public works will be cut by a record to 5.8 trillion yen, the proposal said. The construction industry has underperformed the nation’s stock market since Hatoyama won an election on August 30, with the Topix Construction Index losing 13 per cent compared with a 6 per cent decline in the overall Topix index. Tokyo-based Kajima Corp., Japan’s biggest builder by assets, has lost 30 per cent in that period.