Koizumi’s dream of a balanced budget officially dead: Cabinet Office

July 22, 2008
By Ken Worsley

Just over two years ago, Prime Minister Junichiro Koizumi announced his goal that Japan would have its national budget balanced by 2011. That isn’t going to happen.

Although most observers probably never expected it to happen, the Cabinet Office announced today that rather than having a balanced budget, it expects to see Japan saddled with a budgetary shortfall of 3.9 trillion yen in fiscal 2011. At the same time, this year’s GDP growth forecast was reduced from 2.0% to 1.3% (Last week, the Bank of Japan revised its projections down to 1.2% from 1.5%). Predicted growth in capital spending for this year was revised downward from 3.3% to 0.6%. The rise in consumer prices was revised upward from 0.3% to 1.7%. Consumer spending was revised downward from 1.3% to 1.0% - we need to bear in mind that household spending was down 3.2% in May, down 2.7% in April, down 1.6% in March, flat in February and up 3.6% in January. That looks like a nasty trend.

In January, the Cabinet Office estimated Japan’s national debt at 700 trillion yen. That’s now estimated to be at 778 trillion yen by fiscal 2009.

The real killer from the government’s perspective is that tax revenues are expected to be down, and that this could lead to hikes in consumption and other taxes. While this talk is going on, we also see that the Cabinet Office wants to encourage Japan’s households to dump their 775 trillion yen in deposit assets into the financial markets.

Will this plan get anywhere? I have to agree fully with Macquarie’s chief economist Richard Jerram, who was quoted in the Times as saying:

It was perfectly reasonable for individual Japanese to put their money in savings and make virtually nothing by way of returns because economic mismanagement by the Government meant that putting their money into other assets would have made them less than nothing.

Adding fuel to the fire, new Financial Services Agency regulations have seriously hurt bank lending, which is in turn seriously hurting real estate developers and contractors. The FSA is insisting that banks sever ties with “antisocial forces” - a move that is sure to hurt certain sectors, and has caused new compliance headaches. As banks try to step up their risk management, real estate funds are being forced to seek fresh capital overseas. Suruga declared bankruptcy in June after it was discovered that the firm employed a real estate broker with less than wholesome ties. Earlier today, Suruga announced that Goldman Sachs had sold the bulk of its 10% holdings in the firm to US fund manager DKR Oasis Management. Suruga will be delisted from the Tokyo Stock Exchange later this week.

The one voice we’re waiting to hear from on all this, ~~Mr Koizumi~~ Mr Takenaka, has been quiet this month. How long can that continue?

Filed Under Cabinet Office, Economic Reports, Finance