Japan’s $1tr budget highlights COVID-19 challenge to growth

Japan’s cabinet approved on Monday a record $1.03 trillion budget draft for the next fiscal year starting in April 2021, the Ministry of Finance said, as the coronavirus and stimulus spending puts pressure on already dire public finances.

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

From Europe to America, policymakers globally have unleashed a torrent of monetary and fiscal stimulus to prevent a deep and prolonged recession as the pandemic shut international borders and sent many out of work.

In Japan, fiscal reform has been shelved as Prime Minister Yoshihide Suga prioritised efforts to contain the pandemic and boost growth, despite public debt at more than twice the size of Japan’s $5 trillion economy.

“How to balance the coronavirus response with fiscal reform has hardly been debated in Japan,” said Izuru Kato, chief economist at Totan Research. “Ultra-low interest rates under the Bank of Japan’s prolonged monetary easing may have caused fiscal discipline to be paralysed.”

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

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

“We had to strike a right balance between the needs to prevent the spread of infections, revive the economy and achieve fiscal reform,” Finance Minister Taro Aso told reporters after a cabinet meeting. “That was the most difficult task in compiling this budget.” The government’s fiscal 2021 primary budget deficit - excluding new bond sales and debt servicing - is seen at 20.4 trillion yen, more than double this year’s initial estimates, making the budget-balancing goal further elusive.

Rating agency Fitch in July cut its outlook on 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 may raise worry about ‘fiscal cliff’, which could justify calls for more spending in the coming fiscal year,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

Tokyo stocks traded lower on Monday as investors weighed the impact of spreading Covid-19 infections on the economy against the positive effects of new US and Japanese stimulus.