Japan’s already dire fiscal condition is worsening further amid government plans for massive spending to counter the COVID-19 epidemic.
In fiscal 2020, which started in April, the government’s general-account spending is slated to total ¥160.3 trillion after two supplementary budgets of ¥25.7 trillion and ¥31.9 trillion, respectively, are stacked on top of the initial budget of ¥102.7 trillion.
Japan’s deficit in the primary budget balance had been narrowing in recent years, but the deficit for fiscal 2020 swelled to ¥66.1 trillion after the two extra budgets were compiled, versus ¥9.2 trillion from the initial budget only.
A primary balance deficit means a country cannot finance its annual budget without issuing new bonds — even when debt-servicing costs are excluded.
Japan’s oft-delayed goal now is to achieve a primary balance surplus in fiscal 2025. But a senior Finance Ministry official said, “Realistically speaking, it’s almost impossible.”
Given the pandemic, the government faces little opposition to aggressive fiscal spending, though there are concerns the government is again being complacent about fiscal consolidation.
“It’s true that our fiscal situation is extremely severe,” Finance Minister Taro Aso has admitted.
At the same time, Aso defended the government’s spending plans, saying the viral crisis forced “even Germany,” viewed as a fiscal disciplinarian, to splash out on fiscal spending.
But Japan seems to have less scope than other advanced economies to increase spending, given that its ratio of outstanding debt to gross domestic product came to 237.4 percent in 2019, overshadowing 59.8 percent in Germany and 109 percent in the United States.
The total value of outstanding Japanese government bonds is projected to reach a staggering ¥964 trillion at the end of fiscal 2020.
Major rating agency S&P Global Ratings downgraded its rating outlook for JGBs on Tuesday.
There is a persistent view that trust in JGBs could fall in the future, although the Bank of Japan’s purchases are currently preventing the JGB market from collapsing.
“Outside Japan, there seems to be an unspoken consensus that tax hikes and spending cuts will be inevitable in a post-coronavirus era, but such a view is not widely shared in Japan,” Izuru Kato, president of Totan Research Co., said.
As its fiscal condition worsens with more spending, prices show little sign of picking up. Instead, the pandemic has raised the possibility that the economy will slip back into deflation.
A majority of analysts polled recently shared a view that deflationary pressure stems from social curbs to halt the spread of the disease hitting businesses and consumers.
With the world’s third-largest economy set to suffer a more than 20 percent contraction this quarter, over half the analysts surveyed bet the BOJ will further expand its already massive monetary stimulus.
“Even after the pandemic is contained, Japan’s output gap will unlikely return to positive territory this year and next,” said Hiroshi Ugai, chief economist at JPMorgan Securities Japan.
“That means Japan may suffer a mild deflation.”
When asked whether the pandemic could tip Japan back into deflation, 23 of 40 analysts polled said the chances were either high or very high. The remainder said the likelihood was low.
Core consumer prices, which exclude volatile fresh food but include energy costs, are seen falling 0.5 percent in the fiscal year ending in March 2021, the poll between June 2 and 11 showed.
Core consumer inflation is projected to hit a modest 0.3 percent next fiscal year, according to the poll.
With business activity hit by restrictive measures imposed from April through late May, the economy is expected to shrink an annualized 21.3 percent in April-June, marking the third straight quarter of contraction, the poll found.
GDP was seen rebounding 8.0 percent in the third quarter and 5.4 percent in the final quarter of 2020.
The economy will shrink 5.2 percent this fiscal year before recovering to 3.2 percent growth next year, the poll showed.
The government issued a state of emergency in April requesting citizens to stay home and many businesses to shut.
Although the state of emergency was lifted in late May, there is uncertainty how quickly businesses will fully reopen. The need for social distancing policies could hurt profits for many retailers, analysts say.
“Economic activity has restarted in several phases but there’s still a risk of another wave of infection. That will keep consumers cautious,” said Mari Iwashita, chief market economist at Daiwa Securities.
The BOJ eased monetary policy for a second straight month in April and created in May a new lending facility to channel money to small firms hit by the pandemic.
The government has laid out two spending packages worth a combined $2.2 trillion to ease the pain on an economy already headed for deep recession.