Japan bets on "Abenomics" to boost growth, budget income
By Tetsushi Kajimoto | January 28, 2013 10:49 PM EST
Japan's government on Monday forecast a strong rebound in economic growth that could nudge tax revenue in the next budget above borrowing for the first time in four years, but analysts say it will need to do more to show it takes fiscal discipline seriously.
Prime Minister Shinzo Abe, who led his Liberal Democratic Party back to power in a December landslide with promises of more public spending and ultra-easy monetary policy, told an opening session of the new parliament that reviving the stagnant economy remained the most pressing task.
Under pressure from Abe, the Bank of Japan last week raised the prospect of more aggressive monetary policy by agreeing to a 2 percent inflation target backed by open-ended asset buying. Abe urged the BOJ on Monday to hit its inflation target as soon as possible.
But seeking to dispel concerns the government's stimulus efforts could come at a price of driving Japan's mammoth debt to a point of no return, Abe also promised efforts to bring fiscal deficits back under control.
The government is expected to present its draft budget for the next fiscal year from April 1 as a first such step. After years of deterioration, the draft due to be approved on Tuesday is set to show tax receipts on the rise and borrowing falling below the 44 trillion yen (307 billion pounds) cap maintained by the previous governments.
But analysts point out that the improvement will be only symbolic because taken together with an extra 10.3 trillion yen stimulus approved earlier this month, it would still vault borrowing to new highs.
"I don't think the government has streamlined spending with this budget. Rather fiscal expansion is continuing," said Katsutoshi Inadome, fixed income analyst at Mitsubishi UFJ Morgan Stanley Securities.
"The government is only trying to present a rosy picture of its finances by trimming new borrowing and keeping it below tax revenue in the next fiscal year, while boosting fresh bond issues through an extra budget for the current year."
Citing improving global economic conditions and stimulus at home, the government forecast the economy would grow 2.5 percent in real terms in the next fiscal year, up from 1.0 percent this year.
The forecast is roughly in line with last week's central bank predictions, but more optimistic than a 1.8 percent consensus forecast in a Reuters poll earlier this month and the government's previous 1.7 percent projection published last summer.
Based on that, the budget draft will show tax revenues rising by 1 trillion yen to 43.1 trillion yen, while the amount of new bonds sold to finance the budget gap would fall to 43.1 trillion or less, sources told Reuters last Friday.
Analysts also said growth, revenue and borrowing forecasts all looked realistic. But Abe needed to do much more to convince markets that his government would do enough to bring public debt -- already twice the size of its economy -- back under control.
They said the first serious test will come in August, when the government will decide whether the economy is strong enough to follow through with a sales tax increase, which the LDP agreed to along with other major parties while still in opposition.
"Financial markets will closely watch whether the government can decide in the autumn to go ahead with a planned sales tax hike from April 2014," said Hidenori Suezawa, chief bond strategist at SMBC Nikko Securities.
The government forecast assumes that the planned rise in the tax rate to 8 percent from the current 5 percent in April 2014 will go through, with a spending rush ahead of the hike expected to give growth an extra boost.
While some economists gave the new government credit for "front-loading" borrowing and stimulus in the extra budget and aiming for some tightening later on in the regular budget, others say current borrowing targets are much too lax.
"The amount of borrowing is simply too big. A 44 trillion yen cap may have served as a key target in keeping fiscal discipline in the past, but new borrowing should be reduced further ahead," said Chotaro Morita, chief fixed income strategist at Barclays Securities Japan.
(Writing by Tomasz Janowski; Editing by Neil Fullick)
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