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Economy

Fuzzy math strains Japan's balanced budget goals

Government outlook pushes back primary surplus by two years to fiscal 2027

Japan's rosy economic growth estimates could delay necessary belt-tightening in the government.

TOKYO -- Japan will not generate a primary budget surplus until fiscal 2027, the Cabinet Office said Wednesday, walking back the most recent estimate projecting fiscal parity a year earlier.

This means that the government will miss its goal of achieving a primary balance by two years. The government's fiscal 2025 target, as well as the Cabinet Office's January estimate predicting a fiscal 2026 primary surplus, both relied on exceedingly optimistic economic growth estimates, necessitating reassessments.

In making semi-annual projections, the government tends to presume that Japan will achieve high growth under Abenomics. But if rosy growth scenarios keep delaying necessary belt-tightening, Japan's stated pledge of achieving fiscal health could become even more elusive. 

The primary balance compares total revenue with expenditures by the central government and regional governments, excluding debt-servicing costs. A primary surplus in fiscal 2027 relies on the assumption that the gross domestic product will grow by at least 2% each year in real terms during the early 2020s, and by 3% nominally over the same period.

In the previous primary balance estimate released in January, the Cabinet Office assumed the GDP this fiscal year would grow by 2.4% nominally. Now the agency foresees 1.7% growth, and pushed back the target date for parity by one year.

But even this updated outlook involves overly optimistic calculations. Total-factor productivity, which reflects the effective use of labor and capital, is expected to climb to 1.2% in fiscal 2024, up from about 0.3% currently. The last time the total-factor productivity traced 0.9 point in five years was around the mid-1980s, prior to the collapse of the economic bubble.

The Cabinet Office also released a baseline estimate that assumes the GDP will grow by about 1% a year, in line with the current economic growth potential. Under this scenario, the primary deficit would remain in place until at least fiscal 2028, the final year of the projections.

It has long been Japan's goal to pay for expenditures entirely with revenue, and without having to rely on debt. Government liabilities have grown to nearly twice the size of the economy, and there is a lingering risk that the credit rating on debt will suffer if the budget is not balanced in time.

Still, the interest payments on the debt have been kept low thanks to the Bank of Japan's ultraloose monetary policy. On the fiscal side, annual budgets have come to be less dependent on public debt.

But marginal interest rates have a tendency to prop up unprofitable businesses, which slows down needed industrial shakeouts. By mollifying fiscal woes with monetary easing, opportunities to accelerate economic growth could be missed, which would further delay the primary budget balancing goals. It was only last year the government pushed back the surplus target date to fiscal 2025 from fiscal 2020.

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