Japan OKs Draft Budget With Boost in Spending

Japan today approved a draft initial budget for the fiscal year starting in April that aims at stimulating the economy out of its long recession, but the heavy spending will put the nation deeper into fiscal debt.

The Ministry of Finance unveiled a $706-billion budget plan for the year through March 2000, an increase from this year’s $675-billion initial budget and a record high.

The plan includes a 5.3% increase for general items, which exclude debt payments and tax grants to local governments. That’s a major shift from this year, when general spending shrank 1.3%, the first year-on-year contraction in 11 years.

Japan faces pressure from the U.S. and other nations to act decisively to put its economy, the world’s second-largest, on track for recovery and to become a locomotive for regional growth. Prime Minister Keizo Obuchi has promised to achieve economic growth in the year ending March 31, 2000. Japan’s economy has contracted two years in a row; the government forecast growth of 0.5% next fiscal year.

Parliament this month suspended indefinitely a law mandating budget deficit reductions, allowing the government to spend as much as it takes to pull the economy out of recession.

Under the budget announced Monday, public works spending, for example, will grow 10.6% to $86 billion, including special provisions for stimulus. That compares with this year’s 7.8% reduction.

“Generous spending for public works and other stimulus can support economic growth in the immediate future, but it’s just like a drug,” said Hiroaki Muto, an economist at Sumitomo Mutual Life Research Institute. “You must maintain a high dose, otherwise the economy will immediately slip back into recession.”

Whether the government has the resources to inject more funds into the economy is another question. The government will next year be forced to sell a record $618 billion in bonds, including $269 billion in new bonds. New debt sales will double from this year’s level and be equivalent to 37.9% of the total budget, up from this year’s 20.0%.

“That’s a sheer change from this year,” Finance Minister Kiichi Miyazawa said, referring to a steep rise in the budget’s dependence on debt sales. “Yet we have no other choice in a bid to revive the economy.”

Increased debt sales will be also needed to cover a drop in tax revenue resulting from slumping corporate and consumer activities and tax cuts to be implemented next year. Next year’s tax receipts will contract 19.5%, the Finance Ministry forecast.

On Monday in Tokyo, the Nikkei opened lower.

The budget plan will be officially approved by the Cabinet on Friday.

Separately today, the government reported that Japan’s merchandise trade surplus shrank more than expected in November, as a strong yen and lower demand from the U.S. hit exports.

November’s surplus fell 38.3% to a seasonally adjusted $7.7 billion from October. Compared with November 1997, the surplus fell 15.1%.

The drop in the surplus from October and on the year reflects a strong yen beginning to take a toll on Japanese manufacturers, making their products more expensive overseas.