TOKYO -- With prospects for fiscal rehabilitation already bleak, the Japanese government this summer will write a prescription to nurse its balance sheet back to health.
At least that is the plan.
An additional hike in the consumption tax rate -- it was supposed to go from 8% to 10% in October -- has already been postponed. And there is no strong momentum toward bold spending cuts.
It looks like the prescription will lack any bitter medicine.
Last year, when he delayed his second consumption tax hike -- it had gone from 5% to 8% last April -- Prime Minister Shinzo Abe promised a plan to put Japan's fiscal house back in order. The pledge, made in November, was meant to stave off a potential loss of market confidence.
The consumption tax is now set to be raised to 10% in April 2017. Speaking to the lower house's financial affairs committee, Abe declared on March 13 that "we will raise the consumption tax to 10%, but we are not thinking about any more (consumption tax) hikes to increase tax revenues."
The fiscal rehabilitation plan is expected to include a target of achieving a surplus in the so-called primary balance of national and local government budgets in fiscal 2020. That would mean higher revenues than expenditures, excluding interest expenses.
There are three ways this could be achieved -- economic growth explodes and increases tax revenue, the government cuts back on spending or taxes get raised.
Abe has given signs of what option he will take.
In early February, he held a meeting with some senior government officials, including Akira Amari, the minister for economic and fiscal policy, at his office.
During the meeting, Abe asked, "What does the word 'revenues' mean?" He was looking over a document prepared by private-sector members of the Council on Economic and Fiscal Policy, a powerful government panel chaired by the prime minister.
The document calls for considering "additional measures in terms of expenditures and revenues as necessary."
The inclusion of the word "revenues" reflects a hidden desire among the private-sector council members to keep open the future option of raising the consumption tax to more than 10%.
Abe's unexpected question upset some meeting participants. One of them danced around it, replying, "There are other issues such as taxing assets and reducing disparities."
A consumption or sales tax disproportionately hits low-income people who spend most or all of what they earn each month.
The document in question was also discussed Feb. 12 during a meeting of the Council on Economic and Fiscal Policy. After the meeting, Amari made clear the government's basic policy of raising the consumption tax only once over the next five years.
For Abe and Amari, the top priority is to realize a favorable economic cycle to ensure that the consumption tax can be increased from 8% to 10% in April 2017, as planned. They believe it is too early to talk about a consumption tax rate of more than 10%.
Two rival factions
Former Prime Minister Junichiro Koizumi once declared, "I will not raise the consumption tax while in office." In 2006, he aggressively addressed the issue of slashing government spending.
At the time, there was a fierce struggle over economic policy between two groups within the ruling Liberal Democratic Party. One was dubbed "the tax-increase faction," and the other "the rising-tide faction."
The tax-increase faction, led by Kaoru Yosano, then minister for economic and fiscal policy, called for raising the consumption tax to boost government revenues.
The rising-tide faction, led by Hidenao Nakagawa, then chairman of the LDP's Policy Research Council, pushed ahead with drastic cuts in government spending while also pursuing higher economic growth.
Koizumi supported the rising-tide faction. Giving Nakagawa a pep talk, Koizumi said, "Cutting government expenditures is a historic step for the LDP."
In response to a request from Koizumi, Nakagawa played a leadership role in compiling a plan for curbing annual growth in social security expenditures -- a key government spending item -- by 220 billion yen ($1.82 billion at the current exchange rate).
Today's ruling party
Can the Abe government act as steadfastly?
In February, Nakagawa delivered a lecture at LDP headquarters at the request of Tomomi Inada, chairwoman of the party's Policy Research Council, a post Nakagawa once held.
Nakagawa stressed the need for the LDP to seriously address the issue of fiscal consolidation, but he drew a strong backlash.
In a comment posted online, one LDP lawmaker said, "The Koizumi Cabinet is responsible for the outbreak of deflation. Its financial retrenchment caused deflation."
Even a senior official at the LDP's tax panel, which advocates fiscal discipline, is cautious about spending cuts. "If social security expenditures are cut," the official said, "the government would collapse."
Amari, the minister for economic and fiscal policy, also warned against pursuing spending cuts.
Yosano, the former minister for economic and fiscal policy, lambasted the Abe government and the ruling party for their "irresponsible" handling of the nation's dire fiscal conditions "without thinking about the future at all."
At the Council on Economic and Fiscal Policy's meeting Feb. 12, Haruhiko Kuroda, governor of the Bank of Japan, said that Britain and Germany now argue for classifying government bonds as risk assets and warned that such a step would have a significant impact on the Japanese economy.
If Japanese government bonds are treated as risk assets, Japanese banks, which hold huge amounts of them, would come under pressure to boost their capital.
Warning about the dire consequences, Kuroda called for rebuilding debt-laden government finances as quickly as possible.
But the Abe government has no sense of crisis. Ironically, it is the BOJ that is allowing the government to be complacent.
"When the government compiles the fiscal rehabilitation plan in the summer, the BOJ will still be purchasing (huge amounts of) government bonds under its quantitative easing policy," a senior official at the Cabinet Office said, describing a process that is essentially printing money. With the BOJ stepping into the market on such a large scale, the official added, there is little possibility that interest rates will rise and threaten the economy.
The government appears optimistic as it readies its fiscal rehabilitation plan -- despite Japan's national debt having already exceeded 1 quadrillion yen.
If the plan does not contain serious measures -- such as tax increases and drastic spending cuts -- financial market players could lose their confidence in Japan, like they have with Greece.