Japan faces crucial fiscal deadline, money could run out by end-October
Japan is slowly edging toward its own version of a “fiscal cliff” as legislation needed to sell bonds for this fiscal year’s budget languishes in a split parliament, suggesting the government could run out of money by the end of October.
The fate of the bill is in the hands of the opposition, which controls the upper house and used its clout to make Prime Minister Yoshihiko Noda promise an early election in return for the passage of his sales tax hike plan early this month.
Now, a tacit threat that the budget financing bill put on hold during the tax stand-off could get blocked is keeping Noda under pressure to make good on his pledge to call a vote “soon.”
Government sources said without the bill, which would allow it to sell 38.3 trillion yen in bonds or more than 40 percent of this year’s budget, the economy and Japan’s debt ratings could take a hit.
“Inability to sell the bonds that we need to is not a liquidity problem, it’s a sovereign problem,” said one government source with direct knowledge of the matter.
“The government is going to have to make some very hard decisions about what spending to cut if there’s no agreement on this legislation in the next few weeks.”
The term “fiscal cliff” is commonly associated with around US$500 billion in expiring US tax cuts and spending cuts that could kick in automatically next year, leading to a “significant recession,” according to the Congressional Budget Office.
In Japan, five months into a fiscal year that started in April, the government has made do without the bonds bill by dipping into reserves in special accounts and making technical adjustments to bond auctions, government sources said.
But Finance Minister Jun Azumi warned last month that without fresh borrowing the government will run out of money by October.
That would halt benefits to unemployed and low-income earners, salaries for civil servants and transfers to rural governments, fuelling concerns that the government was losing its grip on public finances.
Japan has already been hit by a string of credit downgrades because of concerns that it was not doing enough to curb its debt burden, the world’s largest at twice the value of its annual economic output.
Noda’s Democrats, keen to forge ahead, want to vote on the bonds bill in the lower house they control as soon as next week after clearing it in a committee on Friday, but it is far from clear if and when it could pass the opposition-controlled upper house.
The first important date to watch is Sept. 8 when the regular parliament session ends. If the bill fails to pass by then, the government and the opposition will have an option to pass the bill early in October in an extra parliament session.
Much will depend whether the opposition accepts the suggested election calendar where Noda would call a snap poll in October and the vote could be held in early November.
“There is still a chance for a deal, because the economy isn’t that strong right now and a government shutdown would do even more damage,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
“Basically, this isn’t something that should be at the centre of political bickering, but we see similar behaviour in other countries.”
Without an assurance that the bill will pass, the government will probably start cutting tax grants to local governments and money for government-affiliated agencies from September, one government source said.
If money does run out in October, jobless benefits, benefits for the poor, some healthcare benefits, education allowances and other welfare programmes could stop, the source said, which would hurt private consumption.
Some politicians argue that Azumi is exaggerating to put pressure on the opposition. Still, the longer the deficit financing bill languishes, the more doubts will mount.
Japan’s ruling Democrats faced a similar standoff over the deficit financing bill last year and only secured its passage in late August after then prime minister Naoto Kan stepped down.