No. 13 — March 31, 2000


Weekly Review

--- by Jon Choy

Japan's three-party ruling coalition is taking care of fiscal business amid growing speculation about when it will call elections for the lower house of the Diet. The six-month-old alliance, composed of the Liberal Democratic Party, the Liberal Party and the New Komeito, moved the general account budget for FY 2000 through both chambers of the Diet at a record-matching pace. The spending plan was approved March 17, well ahead of the April 1 start of the new fiscal accounting period. The initial FY 2000 budget is the biggest ever — a booster shot in the arm of an economy still not back on a steady growth track. Tokyo also hopes to inoculate the economy against longer-term fiscal ailments, especially the burden of a fast-expanding outstanding national debt, the increasing need for social services as the population grows grayer and the declining base of working taxpayers (see previous article).

The FY 2000 budget legislation (see JEI Report No. 1B, January 7, 2000) was introduced in the lower house January 29 and given final approval by that chamber February 29. Regardless of what the upper house did, it would have become law after 30 days, according to the constitution. The House of Councillors, however, also completed its budget deliberations in short order, giving the ultimate okay to the spending plan by mid-March.

At nearly ¥85 trillion ($772.7 billion at ¥110=$1.00), the FY 2000 general account budget is 3.8 percent bigger overall than this fiscal year's starting plan. Notably, it includes a 2.6 percent increase in discretionary outlays to a record ¥48.1 trillion ($437.3 billion), but only the same amount as in FY 1999 is earmarked for stimulative public works projects — ¥9.4 trillion ($85.5 billion). Among other features, a ¥120.6 billion ($1.1 billion) block of money is set aside to fund so-called Millennium Projects, which involve forward-looking investments in the areas of communications, the environment and advanced technologies.

According to Ministry of Finance projections, tax revenues in FY 2000 will increase for the first time in three years, rising 3.3 percent to ¥48.7 trillion ($442.7 billion). Nontax revenues also are expected to eke out a small increase of 0.7 percent, bringing them to about ¥3.7 trillion ($33.6 billion).

Despite the positive outlook for budget receipts, Tokyo will have to float a record ¥85.9 trillion ($780.9 billion) worth of bonds in the upcoming fiscal year. This eye-popping figure consists of ¥53.3 trillion ($484.5 billion) in rolled-over debt and ¥32.6 trillion ($296.4 billion) in entirely new borrowing. The flood of bond issues will lift the budget's dependence on borrowing to 38.4 percent of revenues and push the combined outstanding debts of central, prefectural and municipal governments to more than ¥645 trillion ($5.9 trillion) by the end of FY 2000. At a forecast 129.3 percent of gross domestic product, this total not only will shatter the existing record but, more ominously, create a long-term fiscal burden of gargantuan size.

Another facet of the big-picture fiscal debate is reform of the Fiscal Investment and Loan Program, a second, separately funded capital budget. The FILP plays a central but complicated role in Japan's public works machine (see JEI Report No. 2A, January 14, 2000), which makes change an especially sensitive political issue. This system also is tied to government-administered pension plans, which lend money to FILP agencies. Because these social security-like funds must earn higher returns to satisfy the pension needs of the country's growing population of retirees, program administrators have pushed for the freedom to invest in non-FILP vehicles. Not surprisingly, MOF has resisted this change since it would necessitate lining up new sources of funding for a big part of public investment.

The cabinet of Prime Minister Keizo Obuchi offered its vision of the FILP's future in a package of bills approved March 7. The restructuring, which is scheduled to begin in April 2001, has two main objectives:

orce FILP-funded organizations to operate more like private-sector businesses. Tokyo plans to require these quasi-governmental agencies to employ strict cost-benefit analyses as a way to encourage them to turn a profit. They also would have to follow standard corporate accounting practices and to release their financial results. These changes, the government hopes, will whip all such organizations into shape, making their bonds salable on the open market just like those of corporate Japan and ending their dependence on government handouts. Tokyo still expects to guarantee the bonds of some of these semipublic operations, but it will not provide the blanket carte blanche available in the past.

ever the financial links between Tokyo and FILP-backed organizations. Once quasi-governmental agencies begin raising their own money in the open market, MOF's Trust Fund Bureau will end loans from the postal savings system and public pension trust funds to the FILP. The Finance Ministry also will quit buying debentures issued by long-term credit banks that have acted as the government's agents in making lengthy loans to industry. In addition, MOF will stop purchasing bonds issued by such FILP agencies as regional and infrastructure development organizations. Finally, the Trust Fund Bureau will be abolished as part of the reforms since it no longer will have a role to play.

In a related move, the Ministry of Posts and Telecommunications has drafted amendments to the Postal Savings Law to give administrators discretion in making investment decisions. All postal savings monies now managed by the Trust Fund Bureau will be transferred back to the post office system, which, in turn, will be restructured into mail-handling and financial agencies. Life insurance funds will be handed over to a new agency that will be run more like a private investment advisory company, making portfolio decisions based on thorough research and hard calculations.

The FILP legislative reform plan looks good on paper, but with implementation set to begin in just 12 months, it is not clear if this time frame is practicable. Moreover, the Japan Highway Corp., the Housing Loan Corp. and the many other quasi-governmental development and lending entities that depend on FILP funds will not find it easy to operate like the typical private firm.

Data released March 28 by the Finance Ministry indicates the need for at least ¥5 trillion ($45.5 billion) in public funds over the next 40 to 50 years just to make these organizations solvent. If the ministry's numbers are correct — outside experts say that MOF is underestimating the hidden losses by five to 10 times — the creditworthiness of these entities could be compromised. It also is unclear whether MOF can handle the transition smoothly enough not to disrupt bond markets — a critical concern given the heavy borrowing requirements of the FY 2000 budget and, presumably, its successors.

Mr. Obuchi is hoping that the FY 2000 general account budget will be stimulative enough to tip the scale in favor of sustained growth. The political fortunes of the ruling coalition in the lower house elections arguably will turn on the economy's relative health. Finance Minister Kiichi Miyazawa is putting an optimistic face on the spending plan, saying that it will be sufficient to realize the government's goal of 1 percent real GDP growth in FY 2000 without resorting to a supplemental budget. Vice Finance Minister Nobuaki Usui added that it would not be necessary to concentrate public-works contracts in the first quarter of the new fiscal year — a practice known as front-loading — because of the government's upbeat assessment of economic activity in the January-March 2000 quarter.

Outsiders are skeptical, noting that without a supplement, government spending will fall in FY 2000 relative to FY 1999's twice-boosted budget. If the economy fails to respond to the FY 2000 budget's stimulative thrust, not only will the future of the LDP coalition be thrown into doubt, but the government's long-term plans for reforming the FILP also could be derailed.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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