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TMCNet: 3RD LD: Japan to shelve spending cut policy to spur economy+

[December 03, 2008]

3RD LD: Japan to shelve spending cut policy to spur economy+

(Japan Economic Newswire Via Acquire Media NewsEdge) TOKYO, Dec. 3_(Kyodo) _ (EDS: ADDING INFO, COMMENTS OF ASO, NAKAGAWA, YOSANO)

Japan will shelve its spending cut policy in compiling the budget for fiscal 2009 in a bid to prioritize stimulus measures over efforts to improve the nation's fiscal health, according to the government's basic guidelines for budget formulation adopted Wednesday.

The Cabinet of Prime Minister Taro Aso endorsed the basic guidelines Wednesday evening. The written policy stipulates that the government will "decisively take prompt and flexible actions" to shore up the economy, which "has entered into a recessionary phase" amid the global financial crisis.

Aso told reporters that the world has been experiencing a financial calamity that could occur only once in 100 years, and that the government will "firmly respond to the changing conditions" of the Japanese economy, which he compared to a "living creature."

The premier vowed to swiftly compile the budget for the fiscal year starting April 1 based on the guidelines. The government is scheduled to adopt a draft fiscal 2009 budget in late December.

In the guidelines, the government backpedaled on its fiscal rehabilitation efforts, as it softened expressions regarding a spending reduction policy set in fiscal 2006 by the administration of then Prime Minister Junichiro Koizumi, who spearheaded structural reforms.

The Cabinet of Aso's predecessor Yasuo Fukuda confirmed in July that the government will continue to slash spending on public works projects by 3 percent from a year earlier and keep curbing the natural increase in social security costs caused by the rapid aging of the population by 220 billion yen in the fiscal 2009 budget.

The latest guidelines said the government will "maintain" that policy, rather than "firmly adhere to" it as written in an earlier draft.

Aso justified the modification, saying economic conditions since September this year have been "totally different" from the situations experienced by his predecessors.

The premier reiterated his resolve to cure the Japanese economy in three years by implementing economy-boosting steps and conduct fiscal reforms over the medium term.

The written policy said the government will heed the Nov. 15 joint declaration in Washington by leaders of the Group of 20 major economies, which said that they will "use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability."

Finance Minister Shoichi Nakagawa and Economic and Fiscal Policy Minister Kaoru Yosano also maintained that the government will never abandon its goal of fiscal rehabilitation.

"We will continue to observe fiscal discipline but the conditions of the world and Japanese economies have worsened significantly. We should heed such circumstances," Nakagawa told reporters.

Yosano said Tokyo will stick to the reforms advocated by Koizumi but that the Japanese economy "has been hit by unexpected turbulence."

The guidelines also watered down descriptions on Japan's target of achieving a primary balance surplus in fiscal 2011, saying the government will "make efforts to realize" it. Last year's written policy on budget formulation said the government will "never fail to" do so.

A surplus in the primary balance is achieved when expenditures, excluding debt-servicing costs, are covered by revenues without relying on debt issuance.

Yosano said, "We need to keep hoisting the flag (of fiscal consolidation) even though it is ragged and stained."

Earlier in the day, Kosuke Hori, policy research council chairman of the ruling Liberal Democratic Party, said at the policy panel meeting that Aso instructed the party to draw up stimulus measures regardless of the spending cut policy.

Hori said Aso has called for creating "a special category" in the fiscal 2009 budget to spur the economy.

The premier later indicated that the government will consider earmarking such expenses, telling reporters, "We can study various options. We will consult with ruling parties."

A senior LDP official, who declined to be named, said the size of the special category should be around 10 trillion yen and that such an allotment should be made for three years, bringing the total scale of the arrangements to 30 trillion yen.

The LDP official added that the government should issue construction bonds to finance the measure.

Separately, Aso is planning to newly distribute 1 trillion yen to municipalities in local tax grants to revitalize ailing regional economies, government sources said.

The money will be provided to local governments on top of 1 trillion yen in state subsidies which will be used to finance road construction and other public works projects, they said.

Unlike state subsidies allocated for specific projects, municipalities face no restrictions in spending local tax grants.

Critics say such an expansionary fiscal policy could fuel concerns about the nation's fiscal conditions, which remain the worst among advanced economies.

Japan's outstanding long-term debts at the national and local governments are expected to reach 148 percent of its gross domestic product on March 31, 2009.

Copyright ? 2008 Kyodo News International, Inc.

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