Japan OKs Record Budget, Sees Deflation Threat Recede

Japan approved its biggest ever budget Tuesday, as an improving economy and a sales tax hike made room for more defense spending and the first step towards achieving a balanced budget.

Prime Minister Shinzo Abe’s cabinet rubber-stamped a plan that will see the government spend ¥95.88 trillion (US $922 billion) in the year from April 2014, up from ¥92.61 trillion the previous year.

The figure is the largest in Japan’s history due to changes in accounting rules and the sales tax, which will rise from five percent to eight on April 1.

The budget came on the day that a key government report dropped the word “deflation” for the first time in more than four years, saying the economy “is on the way to recovery at a modest pace.”

The lion’s share of the extra revenue generated by the sales tax rise is ear-marked for spending on snow-balling medical fees and other social welfare costs.

Even so, the projected primary balance deficit — the shortfall between what the government gets and what it spends on everything apart from debt-servicing — is expected to shrink by ¥5.2 trillion to ¥18 trillion.

That means Japan’s national debt — already the highest proportionately in the industrialized world — will continue to rise, but at a slower pace.

The government’s official policy is that Japan’s primary balance should be in surplus by 2020, although most analysts expect that target to be missed.

In line with defense policies announced last week that are intended to shore up the way Japan protects its remote islands at a time of rising tensions with China, military spending will increase for the second consecutive year.

Overall it will rise 2.8 percent to ¥4.88 trillion, accounting for 5.1 percent of the whole budget.

The bulk of the increase reflects salary hikes, with the remaining 0.8 percent set aside for new fighter jets, drones and a new amphibious unit.

Until last year, Japan’s military budget had been shrinking for a decade, in contrast with China’s, which has seen double digit rises most years over the same period.

But that did not stop Beijing lashing out at the plans when they were announced last week, with a spokesman saying they “must cause concern to neighboring countries in Asia.”

Social welfare spending will rise 4.8 percent to ¥1.40 trillion and will be partially financed by the VAT rise.

The government would like to reduce medical spending, for example by using generic drugs, and divert the cash to support households with children, such as by providing more daycare as part of an effort to reverse Japan’s chronically low birthrate.

Science and technology spending will rise 2.8 percent to ¥1.34 trillion, reflecting Abe’s aim of revitalizing the economy by helping to make Japan Inc. more globally competitive.

Masamichi Adachi, senior economist at JP Morgan, said the budget did little to help Japan’s poor fiscal health improve, with a weighting on stimulus to offset the coming sales tax hike.

“That is all right as long as an economic boom continues, but sooner or later the question will arise over the structural problems of the fiscal balance.

“The primary balance improvement in fiscal 2014 is mainly thanks to a sales tax increase, but that won’t happen in years to come.

“To rely on (increases in tax income from) the economic boom we need to carry out structural changes that will improve growth potential, such as loosening labor regulations,” he said. [via]