TOKYO -- As its goal to achieve a primary surplus in fiscal 2020 looks increasingly unrealistic, Japan is poised to adopt another fiscal target that is easier to attain -- reducing the debt-to-GDP ratio.
The addition is to be included in the basic policy direction draft to be presented Friday to the Council on Economic and Fiscal Policy, a powerful government panel chaired by Prime Minister Shinzo Abe.
In 2015, the government set a target to turn the country's primary deficit of the national and local governments to the black by fiscal 2020, followed by a steady drop in the proportion of debt to gross domestic product. A surplus would mean Tokyo could cover annual policy-related expenditures such as social security costs and public works projects through tax revenue, without relying on government bonds.
But as tax revenue growth slows, more government officials and ruling-party members appear to see the primary balance objective as difficult to achieve. Some ruling-party members had thus proposed pushing back the timeline for reaching a surplus and focusing instead on lowering the debt-to-GDP ratio as an immediate target. The government heeded the proposal and decided to add the metric as an indicator.
Of the two components making up the ratio, debt is affected by long-term interest rates, whereas the GDP reflects economic growth. Ultralow interest rates on the back of the aggressive monetary easing by the Bank of Japan keeps the debt balance from rising sharply, while the nominal growth rate has been recovering over the long term. The Cabinet Office thus expects the debt-to-GDP ratio to drop over the next few years.
When he spoke at a meeting of the lower-house Committee on Audit and Oversight of Administration in April, Abe suggested that he would not cling to the fiscal 2020 primary balance goal. "If we seek to turn the primary deficit to the black no matter what, we could, but if the economy gets shaky as a result, we will be right back where we started," he said.
The prime minister's top priority is to drive Japan out of deflation. Having the debt-to-GDP ratio as a fiscal health barometer would work in favor of spending boosts in education and defense. Meanwhile, the finance ministry sees a primary balance target as a vital part of fiscal discipline, and is concerned that government spending may increase if the new yardstick comes to the fore.
The government is likely to decide next year whether to keep the current primary balance target, and whether to go ahead with the planned October 2019 sales tax hike. The addition of the debt-to-GDP ratio may be a preparatory step for Tokyo to extend the deadline for the primary balance goal.