TOKYO -- Despite signing off on a record 97.45 trillion yen ($828 billion) draft budget for fiscal 2017, the Japanese government has managed to keep new bond issuances mostly unchanged by anticipating an increase in tax revenue as well as a drop in government bond interest payments. But a lack of structural reforms means the government remains dependent on short-time fixes like the weak yen and superlow interest rates.
The government dubbed the budget as a move toward both economic recovery and a restoration of fiscal health. Its description is peppered with feel-good promises, such as better conditions for child care workers, more research funding, a 500 billion yen cap on increases in social security costs, and even a 0.2% decrease in new bond issuance.
But the plan hinges on a number of assumptions. Tax revenue is expected to fall 1.7 trillion yen short of projections for the fiscal year ending in March, due to sluggish corporate earnings caused by a strong yen. The figure is presumed to recover in fiscal 2017 on U.S. President-elect Donald Trump's policies, but it seems unlikely that tax revenue will continue growing in a straight line.
Thanks to the Bank of Japan's negative interest rates and yield target of zero for government bonds, the govenment of Prime Minister Shinzo Abe expects to pay interest of just 1.1% next fiscal year on its debt, saving some 500 billion yen. Without the central bank's efforts, the debt would grow even larger.
The government has achieved some of its immediate goals toward curbing welfare costs, such as raising medical co-payments for high-earning patients 70 and older, and reducing the price of expensive drugs. But it has not taken the next step. There is no plan in place to deal with the expected surge in costs once baby boomers start turning 75 in the 2020s.
There are both pros and cons to Abenomics, which Prime Minister Abe began championing four years ago when he took office for a second time. Quantitative and qualitative easing weakened the yen and lifted stocks, which helped bring corporations and consumers out of a deflationary mindset. Eased regulations attracted more foreign visitors, while Japan also made strides toward lower corporate taxes and better corporate governance.
But Abe has consistently shied away from the painful reforms needed to ensure future stability in government finances and social security. He decided to postpone a consumption tax hike for the second time, this time to October 2019. Two delays could easily turn into three. Shadows also loom over the government goal to achieve a balanced budget by 2020, given the sluggish increase in tax revenue.
A wave of anti-globalism has swept across the U.S. and Europe, pushing countries to curb their dependence on monetary easing and instead address economic inequality and slow growth with fiscal tools. Japan should not tighten monetary policy so quickly, a move that could grind growth to a halt. But it cannot afford to spend lavishly by taking on more and more debt.
Social security costs, most of which go to the country's elderly, account for 55% of policy-related spending. There is little flexibility left in the budget. Funding for any increase in assistance to low-income or child-rearing households, or incentives to encourage innovation, would have to be pulled from somewhere else.
Abe's government enjoys a level of stability that many other countries envy. Business leaders agree that the prime minister should spend his political capital on social security reform. Companies and households are holding off on big purchases and investments, worried that the system won't last the way things are.
Japan cannot bank on a boost from a Trump presidency and put off necessary reforms. It is time for the Abe government, together with the ruling coalition and other forces, to undertake structural changes for the sake of future generations.