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Fiscal expansion fans fears that swelling debt will hamper growth

‘Abenomics’ could hurt economy in the long term

by Tomoyuki Tachikawa

Kyodo

Prime Minister Shinzo Abe’s “Abenomics” economic policies retain fiscal expansion as a key pillar of the draft budget for the next fiscal year, fanning concern that Japan’s swelling debt could hamper the broader economy in the longer term.

An insufficient commitment to putting the country’s fiscal house in order could drive investors away from Japanese government bonds and push up long-term interest rates, which in turn may discourage the private sector from boosting investment and hinder growth in domestic demand, analysts said.

Abe’s Cabinet, formed on Dec. 26, approved a record-high ¥92.61 trillion initial general-account budget for fiscal 2013 on Tuesday, aiming to bolster the economy, beset by deflation, through large-scale public works projects.

“Without strong economic revitalization, there will be no fiscal rehabilitation and future for Japan,” Abe has said.

But Takeshi Minami, chief economist at Norinchukin Research Institute, said it would be “difficult” for the government to restore the nation’s fiscal condition only by taking measures to improve the economy at home, given the level of public debt.

With 46.3 percent of the initial budget to be financed by new bond issuance, outstanding debt for both the central and local governments is expected to grow some 4 percent to around ¥977 trillion at the end of March 2014, more than double the country’s gross domestic product of about ¥480 trillion.

“The situation in which the Japanese economy relies on external demand is unlikely to change anytime soon,” Minami said, adding, “Unless the world economy grows, the progress on Japan’s fiscal reform would certainly stall.”

Kazuyoshi Nakata, an economist at Mitsubishi UFJ Research and Consulting Co., said if Abe’s spending policy fails to shore up the economy, it may merely balloon Japan’s budget deficit without increasing tax revenues.

If the government cannot hammer out a “reliable” rehabilitation plan, Japan’s fiscal health, already the worst among major developed nations, could “worsen further” and long-term interest rates may “start rising sharply,” Nakata added.

Indeed, prices of 20-year or 30-year JGBs have been falling recently, meaning longer-term interest rates have been on an upward trend, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research.

“The reason is because market participants have become vigilant that (Japan’s) fiscal discipline would be undermined by Abenomics,” Kumagai added.

Norinchukin’s Minami said if long-term interest rates surge without economic recovery, companies and individuals would both become reluctant to invest or take out new loans, which could “negatively affect” the economy.

Fears about Japan’s fiscal sustainability could also make consumers feel uncertain about their future and shy away from buying expensive products such as durable goods, depriving the economy of a chance to grow, economists said.

“If people start to believe that the country will not protect them, they would try to save money to protect themselves on their own,” said Kazuhito Yamashita, a research director at the Canon Institute for Global Studies.

“Under such circumstances, consumption and corporate profits would not grow, worsening deflation. Increasing public spending without fiscal discipline could consequently deteriorate economic conditions,” Yamashita said.

Abe has pledged to implement the economic policies he calls the “three arrows” involving bold monetary policy, growth strategies and flexible fiscal spending, including big public projects works.

Spending on public works projects will increase in the initial budget for the new fiscal year starting April 1 for the first time in four years, up 15.6 percent from a year earlier to ¥5.29 trillion, according to the Finance Ministry.

Earlier this month, Abe’s administration endorsed a ¥13.1 trillion extra budget for fiscal 2012, which ends March 31, the second-largest of its kind, to fund an economic stimulus package in an attempt to add around 2 percentage points to Japan’s real GDP and create at least 600,000 jobs.

With the two budgets covering financing needs for a total of 15 months, the government will aim to take economic steps in a seamless manner.

As for monetary policy, the Bank of Japan said in a joint statement with the government last week that it decided to carry out “open-ended” easing to attain a 2 percent inflation target as soon as possible.

Yamashita said growth strategies, such as regulatory reform, are crucial to getting the economy back on a self-sustainable recovery path. Abe’s government plans to craft them by midyear.