MEXICO CITY – Japan came under renewed international pressure Monday at a meeting of financial chiefs from major economies to step up efforts toward fiscal consolidation and ensure swift passage of legislation to finance the remaining part of this year’s budget with deficit-covering bonds.
The finance ministers and central bankers of the Group of 20 advanced and major developing economies warned in the joint statement that Japan’s difficulty in funding its budget is among the downside risks facing the global economy, along with the European debt crisis and potential sharp fiscal tightening in the United States.
The communique, released after a two-day meeting in Mexico City, also said, “In Japan, further progress in medium-term fiscal consolidation is needed.”
The statement reiterates the call by the International Monetary Fund in its annual meeting in Tokyo last month for Japan to cut its debt and get the bond bill through the Diet, a move stalled by the political deadlock.
Finance Minister Koriki Jojima told reporters in Mexico City that he explained the government’s ongoing efforts to have the bill clear the Diet, its fiscal reform steps centering on planned consumption tax hikes and its latest economic stimulus measures.
Jojima said Japan will “steadily deal with fiscal consolidation” and that the bond bill’s passage is his most important issue.
But Jojima downplayed the significance of the joint statement’s reference to Japan’s budget financing as a factor adding to downside risks, saying it is regarded as a short-term issue. “It is a matter different from the U.S. fiscal cliff in nature,” he said.
In fact, in the joint statement, the world’s finance chiefs diluted budget-cutting commitments out of concern that a rush to U.S.- led austerity would choke already fragile global growth.
Citing weak economic expansion, finance ministers and central bankers vowed to ensure the “pace of fiscal consolidation is appropriate to support recovery.” Hours before the presidential election, the U.S. promised to “carefully calibrate” its pullback as $607 billion of automatic tax increases and spending cuts loom.
The growth-friendly pledges highlight a change in tone two years after the richest G-20 members signed up for fiscal consolidation. The new position reflects increased concern that government belt-tightening is harming, rather than helping, the investment and consumption needed to spur economic growth.
The statement “reflects how the consensus has become less austere,” said Torsten Slok, chief global economist at Deutsche Bank AG in New York. “Previously, austerity was thought best, but markets don’t seem to believe that now and politicians are recognizing they have to be realistic over what can be achieved.”
Describing worldwide growth as modest and subject to “elevated” threats, the G-20 identified as risks possible delays in European rescue steps, the potential for sharp fiscal tightening in the U.S., a slowdown in emerging markets and a political impasse over funding this year’s Japanese budget.
“The global economic context remains difficult and the fragile recovery remains at risk if the needed policy actions are not implemented,” International Monetary Fund Managing Director Christine Lagarde told reporters.
After uniting around stimulus to combat the 2009 global recession, the group of leading industrial and emerging markets splintered over whether continued aid or austerity paved the best route to prosperity. At a June 2010 summit in Toronto, eight of the G-20’s richest economies, aside from Japan, committed to cutting deficits in half by 2013 and stabilizing or reducing debt as a share of GDP by 2016.
Advocates of less retrenchment have been strengthened by a midyear global growth slump.