Medium-term Fiscal Hope

The Cabinet headed by Prime Miniser, Shinzo Abe, agreed on medium-term fiscal plan on Thursday. It says that the government will cut the deficit of primary balance, the balance between income and spending in national budget excluding newly delivered national bonds and interest payment for the past borrowing, by half by 2015, and will eliminate by 2020. This is based on a premise that consumption tax hike will be executed along with planned timeline. As long as Abe is skeptical about introducing new tax rate, it is unclear that Japan can persuade international economy.

To achieve the goal of halving the deficit, the government of Japan needs to reduce ¥8 trillions of deficit by 2015. In fiscal years of 2014 and 2015, the government will make an “utmost effort” not to exceed the amount of newly delivered national bonds in FY 2013. It also states that whole budget for social security will be restricted “as much as possible.” In other words, the plan is nothing more than a hope based on optimistic views on Japan’s economy.

The question is whether the world would approve that. In April, G20 requested Japan to show clear vision to reduce its deficit. “Japan should define a credible medium-term fiscal plan,” it said in its communiqué. Japan is going to report about its implementation to reduce deficit at next meeting in September. The key is how Japan will be able to perform the seriousness on its effort.

The former administrations in Japan should not be said as serious to reduce its amount of deficit. In 2006, PM Jun-ichiro Koizumi addressed to turn primary balance into the black by 2011. However, the amount of deficit was tripled in the period from 2006 to 2011. In the administration of Democratic Party of Japan, PM Naoto Kan promised to half the deficit of primary balance by 2015, making the prototype of Abe’s medium-term fiscal plan. But, the amount of the deficit has not been reduced. Total amount of deficit recently exceeded ¥1 quadrillion at last.

Knowing this critical situation, policy leaders in Japan keep on talking about whether the government should decide consumption tax hike. It is obvious that the balance will never be improved without raising the tax rate, making the answer crystal clear. Nevertheless, the discussion does not seem to reach a goal. A tutor of Abenomics economic policy, Kouichi Hanada, appeals to review the plan to raise consumption tax rate, while Governor of Bank of Japan, Haruhiko Kuroda, supports to raise it accordingly.

The point needs to be how to reduce spending. In the name of soaring economic mind, however, the government led by Liberal Democratic does not stop pouring money into building old type infrastructure. The opposite parties are expecting a disastrous outcome of his economic policy.