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Economy

Japan to miss 2025 fiscal target even under rosiest scenario

Government estimate hinges on optimistic growth forecasts and tighter social spending

Prime Minister Shinzo Abe, right, sits with Economic Minister Toshimitsu Motegi while discussing long-term fiscal estimates with the Council on Economic and Fiscal Policy.

TOKYO -- Japan's Cabinet Office released on Jan. 30 its latest fiscal projections, saying the country can achieve a budget surplus excluding debt payments in fiscal 2026.

While this is an improvement from a July projection that said the primary balance would not be reached until fiscal 2027, the new projection is based on more generous assumptions for high economic growth.

Even under this rosier scenario, Japan is set to miss the official government target of erasing its primary deficit by fiscal 2025.

The Cabinet Office offered two scenarios, one representing a baseline case and the other envisioning high growth sparked by Abenomics, named after Prime Minister Shinzo Abe's signature economic policies.

Even under the optimistic scenario, Japan still logs a primary deficit of 1.1 trillion yen in fiscal 2025, its official target year for achieving a surplus. The government has repeatedly pushed back its deadline for achieving this goal.

The rosy scenario forecasts 1.9% growth in Japan's gross domestic product for fiscal 2028, up from 0.9% expected for fiscal 2018.

It also raises Japan's potential growth rate to between 1.9% and 2% after fiscal 2022 from around 1% now, basing that boost on an increase in total factor productivity -- or output explained by factors beyond labor and capital, such as the introduction of information technology -- to 1.3% from 0.4%.

"It's important to strengthen growth potential by raising productivity while urging investment in physical and human resources," Abe said on Jan. 30.

Yet Japan's government lacks concrete plans to encourage such technological innovation, raising doubts about such a productivity boost.

The high-growth scenario also assumes greater tax revenues that improve the primary balance. Japan's budget proposal for fiscal 2019 predicts a record 62.5 trillion yen ($571 billion) in tax revenue. The figure is slated to reach 66.3 trillion yen in fiscal 2020 with a projected GDP growth rate of 1.6%, up from 66 trillion yen under 1.4% growth in the July estimate.

Tax revenue rises each year after fiscal 2020 in the high-growth scenario, reaching 86.4 trillion yen in fiscal 2028. Japan's plan to raise the consumption tax rate to 10% in October from 8% currently looks to provide an extra 5.7 trillion yen annually.

"This is a convenient estimate for the cabinet based on bullish assumptions," said Masahiro Nishikawa, chief fiscal policy analyst at Nomura Securities. "It is unrealistic."

The cabinet also expects to contain spending by curbing growth in social security outlays. Fiscal 2026 spending is projected at 119.2 trillion yen, about 2 trillion yen less than the estimate given in July.

Natural growth in social security spending associated with medical fees and pensions from Japan's aging society will be limited to about 480 billion yen in fiscal 2019. Such expenditures are projected to remain in check after fiscal 2020 as well, reducing costs by 300 billion to 700 billion yen annually compared with last summer's estimate.

The cabinet also said that stimulus measures enacted to support consumer spending after the consumption tax increase will lift growth and contribute to a decrease in government spending once they expire in fiscal 2021.

But it is uncertain whether Japan will be able to wean itself off such stimulus. Expenditures might increase instead should the government's planned refund program that provides "points" for cashless payments at small businesses prove popular.

The cabinet also projected on Jan. 30 that Japan would achieve 2% inflation after fiscal 2020, which means Abe would be unable to meet that goal before his term as Liberal Democratic Party president ends in September 2021. The estimate reflects the government's choice to prioritize the economy over inflation, weighing down prices through efforts to make preschool free and reduce the cost of mobile phone plans.

This is the first time the cabinet has said that the 2% goal would not be met until fiscal 2022. In January 2014, the cabinet forecast reaching the inflation target in about two years, but has not mentioned a timeline since.

Even in the high-growth case, inflation would reach only 1.7% in fiscal 2021, a 0.2 percentage-point drop from July's estimate.

The cabinet also revised its nominal long-term interest rate outlook, with the Bank of Japan set to continue its monetary easing policy. The cabinet maintained its prediction of 0.1% through fiscal 2021, but expects an increase afterward.

Nikkei staff writer Yui Nakamura contributed to this report.

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