Japan okays $800b budget; fiscal goal still looks elusive

Tokyo - Analysts urge spending reform while economy in good shape

Japanese Prime Minister Shinzo Abe's cabinet approved on Thursday a record fiscal 2016 budget that counts on higher growth and tax revenue to achieve his aim of reviving the economy and curbing the world's heaviest debt burden.
But both targets look elusive, according to economists, as Abe's strategy of relying heavily on growth and tax income might backfire. Without serious efforts to curb spending, they say, his budget-balancing goal remains a tall order.
"What if Japan and the world economy peak out? That could deal a blow to tax revenue and reverse the fiscal improvement," said Hidenori Suezawa, fiscal analyst at SMBC Nikko Securities.
Spending for the fiscal year starting April 1 will be ¥96.72 trillion ($799.9 billion), up a tad from this year's initial plan to spend ¥96.3 trillion.
The draft budget - the fourth since Abe returned to power in late 2012 - features record welfare spending to cope with a fast-ageing population and a military outlay that tops five trillion yen for the first time.
The plan includes support for child-raising such as subsidises for baby-sitter fees and preschool education, as well as care for the elderly, following a ¥3.3 trillion extra budget for this fiscal year, unveiled last week.
"Looking at the spending side, fiscal discipline is somewhat weak," said Takeshi Minami, chief economist at Norinchukin Research Institute. "Taken together with the extra budget, fiscal policy leaves the impression of 'pork-barrel' before upper house elections next summer."
Finance Minister Taro Aso said the budget was in line with Japan's aim of achieving a primary budget surplus - excluding new bond sales and debt servicing - in fiscal 2020.
"This budget is appropriate for marking the first step towards our fiscal plan, while managing both economic revival and fiscal consolidation," he told reporters.
Tax revenue is estimated at a 25-year high of ¥57.6 trillion on the back of rising corporate profits, allowing Tokyo to cut fresh borrowing to the lowest since fiscal 2008, before the global financial crisis hit the world's third-largest economy.
For now, fiscal improvement depends largely on tax revenue windfalls from corporate profits due to a weak yen, and on record-low assumed interest rates that limit rises in debt-servicing costs. "If such tail wind stops blowing, fiscal management would become harder from fiscal 2017 onwards," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley. "As such, hurdles remain high to achieve the fiscal 2020 target."