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Analysts split on fiscal crisis timeline

by Masaaki Iwamoto

Bloomberg

Economists are split over how long the government has to rein in the world’s biggest debt burden, a Bloomberg News survey shows, adding to a debate on whether the government should keep ratcheting up the sales tax.

Eleven of 34 analysts said the government has four years or less to put fiscal policy on a sustainable path and avoid a crisis, while seven said it has more than 10 years.

BNP Paribas SA and Credit Suisse Group AG were among five saying it’s too late to avert one. UBS AG says chances of a fiscal crisis are remote.

The lack of consensus offers an opening to opponents of a 2 percentage point increase in the consumption tax, due next year after the 3-point jump next month. At stake is ensuring an improvement in the nation’s finances to assure demand for public debt remains once the Bank of Japan, the biggest buyer of the securities, achieves its inflation target and tapers stimulus.

“The government should demonstrate a clear road map for fiscal reconstruction before 2 percent inflation takes root,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “If it doesn’t do that, investors might attack.”

A longer period would offer Prime Minister Shinzo Abe and his potential successors time to focus on strengthening economic growth before addressing a shortfall in social security financing. Government debt currently exceeds twice the size of gross domestic product.

Those who have expressed concern about the potential damage to a recovery from fiscal tightening have ranged from Nobel laureate Paul Krugman to Koichi Hamada, a retired Yale University professor who advises Abe on monetary policy. The government should freeze plans to raise the levy and instead cut the number of Diet members and bureaucrats, the opposition Your Party says.

While BOJ Gov. Haruhiko Kuroda repeatedly says it’s too early to discuss an exit strategy for the central bank’s easing, he has signaled an immediate need to address fiscal challenges.

Kuroda praised Abe for his October decision to raise the consumption tax to 8 percent, saying it was “very meaningful,” and urged continued fiscal consolidation efforts.

Having warned Feb. 12 that doubts over sustainability of Japan’s finances would push up bond yields, Kuroda said in an interview last Thursday with the Asahi Shimbun that the corporate tax cut planned by Abe would reduce revenue and should be considered within the overall tax framework.

Japan’s debt will equal 242 percent of the economy by the end of 2014, according to the International Monetary Fund. Just 8 percent of its bonds are held by overseas investors, reflecting a large pool of domestic savings.

A risk for the government in coming years is that cushion will erode as baby boomers start to retire in larger numbers from 2015 and draw down savings, said Hidenori Suezawa, a financial market and fiscal analyst at SMBC Nikko Securities Inc.

Japan’s current account balance could swing into a sustained deficit between 2020 and 2025, boosting reliance on foreign creditors and the risk of a surge in yields, said Suezawa, who is a member of the government’s fiscal system council.

“I’m watching the current account balance carefully and am worried about it,” said Masahiro Fukuda, investment director at Fidelity Worldwide Investment in Tokyo, who said a deficit was possible in three to five years. “If a country has twin fiscal and current account deficits, capital could be withdrawn really quickly.”

The Finance Ministry says even under its most optimistic scenario the government will miss a medium-term fiscal reform target outlined in August to achieve a surplus in the budget, excluding interest payments, by fiscal 2020.

The ministry forecasts a primary balance deficit of ¥6.6 trillion in 2020, or 1.1 percent of GDP, compared with ¥23.2 trillion in 2013.

The BOJ is by far the largest single buyer of government debt, accumulating ¥50 trillion a year, equal to 27 percent of planned total issuance for the fiscal year from April.

That support has helped suppress borrowing costs, with the benchmark 10-year government bond yielding 0.62 percent today — the lowest in the world — even with headline inflation of 1.4 percent in January.

“The bond market has been calm the past two years only because the BOJ has been buying,” said Takeshi Fujimaki, an Upper House lawmaker who once advised billionaire investor George Soros.