Shaw Capital Management Newsletter: Japan Submits Budget for 2010

–The Democratic Party of Japan (DPJ) government submitted to the Diet the fiscal 2010 budget amounting to ¥92.3 trillion, its first budget since its inauguration in mid-September. The budget was even larger than its counterpart for the current fiscal year — which was already a record if one includes the second supplementary stimulus package, approved last December. This was because of additional spending on child allowances, free senior high school education, cash subsidies to farmers, and higher payments to
medical institutions to alleviate the shortage of medical doctors. Particularly noteworthy is the large amount devoted to social security, up to ¥27.3 trillion, which account for 51% of general public spending … the first time that the social security share has exceeded 50%. In marked contrast, public works investment, which has been cut back by almost 20%, amounts to ¥5.8 trillion, a record drop that symbolizes the DPJ’s philosophy of shifting money to people from public works... eightynine dam projects are likely to be frozen. At a news conference, Prime Minister Yukio Hatoyama described it as “a
budget meant to safeguard the life of the people.” He also claimed that three reforms were incorporated in the architecture of the budget: first, the principle of a shift of priority “from concrete to people”; second,
initiatives taken by politicians instead of bureaucrats; and third, securing transparency in the budget formulation process. Some creditable aspects notwithstanding, the budget bill appears to be overshadowed, as media reports made clear, by concern over a severe revenue shortage and its implications for the future of Japan’s public finances, which are already debt-laden to a perilous extent as recently pointed out by credit rating agency Standard & Poor’s which raised the prospect of a downgrade in Japan’s sovereign debt rating.

“The budget bill appears to be overshadowed by concern over a severe revenue shortage and its implications for the future of Japan’spublic finances, which are already debt-laden to a perilous extent.”

“Japan’s economic policy flexibility has diminished as a result of increased fiscal deficits and government debt, persistent deflation and a prospect of continued sluggish economic growth”, analysts at the firm said in a note. “It’s impossible to keep tolerating this massive spending,” said Takeshi Minami , chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal health will continue to be exceedingly severe given revenue won’t grow and a stagnant recovery may require additional economic
measures.” A major reason for the squeeze is a plunge in prospective tax revenues due to the economic downturn and the drop in corporate profits. Tax revenues for fiscal 2010 are estimated to fall to ¥37.4 trillion, the same level as 26 years ago, in the mid-1980s — while corporate tax revenues are expected
to be half the amount in normal years. As a result, the government has to raise ¥44.3 billion in new government bonds, compared to ¥53.5 trillion in FY2009. This leaves the treasury dependent on debt for 48% of the total budget, up 10 percentage points. At the end of the fiscal year, on March 31, 2011, the
outstanding balance of government bond issues will have shot up to ¥637 trillion, the equivalent of 134% of Japan’s GDP while public debt will probably spiral to ¥973 trillion, almost double GDP.