Japan’s record $1 trln budget highlights COVID-19 challenge to growth, debt

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© Reuters. FILE PHOTO: People wearing protective masks find their way into a business district in Tokyo

By Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s cabinet on Monday approved a record draft of $ 1.03 trillion for the next fiscal year beginning in April 2021, the Treasury said as spending on coronavirus and stimulus puts pressure on already serious public finances.

The annual budget of 106.6 trillion yen ($ 1.03 trillion) also received a boost from record military and welfare spending. It marked a 4% increase from this year’s initial level and up to nine years in a row, with new debt accounting for more than a third of revenue.

From Europe to America, politicians globally have released a stream of monetary and fiscal stimulus to prevent a deep and protracted recession as the pandemic closed international borders and sent many out of work.

In Japan, fiscal reform has been abolished as Prime Minister Yoshihide Suga prioritized efforts to curb the pandemic and increase growth despite public debt of more than twice the $ 5 trillion economy of Japan.

“How to balance the coronavirus response with fiscal reform has hardly been discussed in Japan,” said Izuru Kato, chief economist at Totan Research. “Ultra-low interest rates during the Bank of Japan’s long-term monetary easing may have paralyzed fiscal discipline.”

The spending plan, which was in line with a Reuters report last week, is due to be approved by parliament early next year.

It will be rolled out along with a third additional budget for this fiscal year as a combined 15-month budget aimed at seamless spending on virus pain relief and back Suga’s goal of achieving carbon neutrality and digital transformation.

The government’s budget deficit in 2021 – excluding new bond sales and debt services – is seen at 20.4 trillion yen, which is more than double this year’s initial estimate, making the budget balancing target even more difficult.

In July, rating agency Fitch cut its outlook for Japan’s debt rating to negative from stable, warning of the COVID-19 impact on rising public debt.

“The massive stimulus spending rolled out this fiscal year could raise concerns about ‘fiscal cuts’, which could justify calls for more spending in the coming fiscal year,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

($ 1 = 103.3100 yen)

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