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Japan parliament set to approve record $870bn budget for FY2023

Fumio Kishida aims to beef up defense capabilities with security threats in Asia

Japanese Prime Minister Fumio Kishida, whose public support is sluggish, faces an inflationary economy that this year will force average Japanese households to spend $460 more on food than they did in 2022.

TOKYO (Kyodo) -- Japan's parliament on Tuesday is poised to approve a record 114.38 trillion yen ($870 billion) budget for the fiscal year that begins next week, with big outlays going to shore up the economy and to defense.

Japan has earmarked a record 6.82 trillion yen for the first year of a five-year period, intending to achieve a substantial boost in defense spending to cope with an increasingly assertive China, a nuclear-armed North Korea and a volatile Russia.

The government of Prime Minister Fumio Kishida hopes to achieve a combined 43 trillion yen in defense spending by fiscal 2027, aiming to double its annual budget to around 2% of gross domestic product from the current 1%.

The approval of the state budget by the upper house comes at a time when the debt-ridden nation has been ramping up spending to ease the burden put on households by rising prices of everyday goods. Core consumer inflation has already hit a four-decade high, mostly due to higher energy and raw material costs amplified by a weaker yen.

The powerful lower house approved the draft budget in February, meaning that under the Constitution it must be enacted before the new fiscal year begins. Both houses of parliament are controlled by a ruling coalition made up of the Liberal Democratic Party and Komeito.

About a third of the 114 trillion yen budget, or 36.89 trillion yen, will be used to cover social security costs, as Japan has one of the world's fastest-aging populations. The government will issue around 35.62 trillion yen worth of government bonds.

Separately, the Cabinet decided to use 2.2 trillion yen in reserve funds for the current business year ending Friday for a fresh inflation-relief package ahead of nationwide local elections.

Low-income households will receive cash handouts, while the government will reduce liquefied petroleum gas bills for households on top of electricity and city gas.

The Bank of Japan expects inflation will decelerate this year and undershoot its 2% target.

Still, average Japanese households will have to spend 60,000 yen more on food items in 2023 than a year earlier, as businesses are expected to raise prices in the coming months, according to an estimate by Mitsubishi UFJ Research and Consulting.

Any boost to the economy from the latest inflation-relief package may be limited. Economists polled by the Japan Center for Economic Research expect the world's third-largest economy to grow 1.03% in fiscal 2023 from April.

Faced with sluggish public support, Kishida has vowed to aid the country's nascent recovery from COVID-19, which is now threatened by inflation. His government has decided to spend over 45 trillion yen on economic stimulus since Russia invaded Ukraine in February 2022.

The outcome of the local elections in April will serve as a gauge of voter confidence in his administration.

The COVID-19 pandemic and Russia's invasion of Ukraine have pushed the government to increase fiscal spending at a time when its financial health remains the worst among the advanced economies, with outstanding debt more than twice the size of its GDP.

The use of reserve funds, allocated for emergencies that can skip parliamentary approval, has come under greater scrutiny since the fiscal 2022 budget had the largest-ever amount of 11.76 trillion yen in reserve.

The new budget, set to clear the upper house on Tuesday, includes 5.5 trillion yen for emergency use to cope with the pandemic and inflation. "Part of the unused reserve funds for fiscal 2022 will be treated as surplus money, which in turn will be used for defense spending," said Takuya Hoshino, a senior economist at the Dai-ichi Life Research Institute.

Kishida has said the government will secure the necessary funding by hiking taxes, among other means. The exact timing of imposing higher corporate, tobacco, and income taxes is yet to be decided.

"If the government continues to allocate huge reserve funds for emergency use and divert part of what is left unused to future defense spending, it makes the flow of funds more complicated than necessary," Hoshino said.

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