If the Democratic Party of Japan-led government fails to gain passage of a special bill to issue deficit-covering Japanese government bonds, suspicions that the country is unable to ward off a looming fiscal crisis will only deepen, two economists interviewed by The Japan Times warn.

The ruling bloc desperately needs to pass the bill in order to issue special deficit-covering JGBs to finance ¥40.7 trillion of the ¥92.4 trillion budget for the fiscal 2011 budget, but it lacks the votes and needs, yet is failing to get, support from an ever-confrontational opposition camp.

If the bill fails to clear the Diet by the March 31 end of fiscal 2010, the government will be unable to finance the fiscal 2011 budget and instead will run out of funds most likely around June.

“When S&P downgraded Japan’s rating (in January), it said in a comment that it questions the DPJ’s political capability. So (if the special bill is not passed) it (could) just prove that is true,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co.

“Japan’s ability to implement policies would come into question,” Miyagawa added.

Standard & Poor’s recently cut its sovereign credit rating for Japan to AA-, the fourth-highest level, citing expected political gridlock for Prime Minister Naoto Kan in handling the budget as one of the reasons.

On Tuesday, Moody’s Investors Service revised the outlook on the government’s Aa2 rating from stable to negative, also pointing to political difficulty ahead for Kan.

“The government intends to introduce a comprehensive tax reform program in June. However, the divided Diet — in which the opposition Liberal Democratic Party controls the Upper House — and the intensifying level of political challenges to Prime Minister Kan together threaten to bog down such efforts,” Moody’s said in a statement.

Many expect the ruling and opposition camps will eventually work out a compromise to avoid a fiscal crisis by June, putting an end to the Diet’s ongoing war of nerves.

But the fear of a fiscal crisis has already underlined Kan’s weak position.

“It is a fundamental problem about Japan’s governance of its finances,” said Mitsuru Saito, chief economist at Tokai Tokyo Securities Co., adding that the negative impact on Japan’s sovereign credit rating would be large if the special bill is not passed.

“Moody’s will probably downgrade the rating,” he said.

As for the short-term impact, Miyagawa said the market will possibly respond by selling Japan-linked stocks if the budget-related bills are scrapped.

But investors will eventually look at the earnings of Japanese firms and soon return to the stock market, he said.

But it is also true that Kan desperately needs middle- to long-term market confidence. As Moody’s pointed out, Kan now is trying to compile a drastic social security reform plan by June, with an eye on raising the consumption tax to avoid a critical fiscal crisis in the rapidly aging society.

Many key politicians agree on the necessity of raising the 5 percent sales levy, but all past Cabinets that have advocated hiking the tax have suffered crushing defeats in ensuing elections.

Kan’s approval rate in media polls — the main source of power to force opposition parties to agree to any tax hike — is now far lower than those of Cabinets past, with a rate now hovering around 20 percent.

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