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Japan-Update

Japan looks to reduce bond floats for eighth year

Tax revenue growth seen outpacing spending hike in fiscal 2018

Japan's Finance Ministry projects lower government bond issuance in fiscal 2018, expecting that tax revenue will increase.

TOKYO -- Japan will lighten its float of government bonds in fiscal 2018 for an eighth straight year, the Finance Ministry decided Wednesday, anticipating that tax revenue growth will exceed the spending increase in the nation's budget.

The JGB issuance, set to total 34.36 trillion yen ($302 billion) in fiscal 2017, would be reduced by as much as hundreds of billions of yen next fiscal year.

A draft fiscal 2018 budget being prepared by the Finance Ministry likely will forecast a roughly 1 trillion yen increase in tax revenue from the 57.7 trillion yen projected for fiscal 2017, putting the figure around 59 trillion yen -- the highest since tax revenue reached 59.8 trillion yen for fiscal 1991. Cabinet approval of the draft budget is expected Dec. 22.

The revenue increase assumes that solid corporate earnings will lift stock dividend payouts as well as wages. The government is slated to upgrade its economic outlook for fiscal 2018. Better economic conditions are expected to fuel higher corporate tax and consumption tax receipts as well.

Total expenditures in the budget appear on track to climb some 500 billion yen to around 98 trillion yen, a sixth consecutive year of record spending.

Reducing bond issuance based solely on expected tax revenue growth carries risks. An economy that performs worse than forecast would bring less in tax receipts, forcing the government to issue more bonds. Fiscal 2016 tax revenue fell short of the initial projection by 2.1 trillion yen or so.

Nevertheless, the argument for tighter spending is not gaining traction, as expected tax revenue growth and low interest payments tied to the Bank of Japan's ultra-loose monetary policy make it possible to increase expenditures without issuing more bonds.

The government has effectively given up its earlier pledge to achieve a primary surplus in fiscal 2020, having decided recently to direct roughly 1.7 trillion yen of the new revenue expected from the October 2019 consumption tax hike toward higher spending on education and other areas.

Controlling government spending should be a high priority for Japan, which sits on one of the heaviest public debt burdens among industrialized nations at more than 1 quadrillion yen. The government plans as soon as June to devise a new blueprint for improving its fiscal health. This new road map needs to include effective means to slash spending, centering on social security, rather than relying only on tax revenue growth to reduce deficits.

(Nikkei)

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