Debt-laden Japan shocked by £630bn spree to ‘save lives’
Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country’s biggest ever postwar budget: a 92.3 trillion yen (£630 billion) spending spree aimed at “saving people’s lives”.
The unprecedented budget, which supposedly shifts Japan’s fiscal spending focus “from concrete to lives”, comes amid rising concern about the solidity of sovereign debt in the world’s second-largest economy.
The new budget will require additional debt issuance of Y44.3 trillion — within the Government’s expected band, but still at a level that will raise Japan’s debt-to-GDP ratio to nearly 195 per cent.
Of foremost concern, analysts for Nomura said, is that Japanese tax revenues are expected to fall to Y37.40 trillion this year, the lowest that they have been since 1984. It was, analysts said, a watershed moment — the first time that new debt issuance has exceeded tax revenues since the Second World War.
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Mr Hatoyama said: “We were just able to stay at a level in which we can maintain fiscal discipline.”
Mr Hatoyama swept to power in August with grand promises that the era of wasteful public spending would end. Japan’s unnecessary and notoriously expensive “roads to nowhere” public works projects would be curtailed and the money diverted to supporting beleaguered households.
Four months on from that victory and Mr Hatoyama has spent more than any of his predecessors and has yet to make any serious impact on the wider effort of repairing Japan’s shattered economy. Unemployment is falling from its March highs, but not at anything like the pace in other Asian economies. Mr Hatoyama has also been hurt personally by the arrest of a former aide this week amid a money scandal that bore all the hallmarks of the politics of “old Japan” — precisely the sort of venality that Mr Hatoyama and his Democratic Party of Japan (DPJ) were elected to crush. Prosecutors in Tokyo accused Keiji Katsuba, 59, of falsifying funding reports beginning in 2000 and listing dead people as donors.
Political analysts said that the episode would not be crippling to Mr Hatoyama, who has denied knowledge of the matter and does not face charges, but it adds to pressures that already include a weakened domestic economy and strained relations with the United States.
Seiji Adachi, senior economist with Deutsche Bank, said: “The scandal in itself is not so serious, but it tarnishes his reputation further and diminishes his power to be an effective prime minister.”
The Government hopes that the budget’s inclusion of steps such as allowances for families raising children and free public high school education will boost its popularity before an Upper House election next summer. That election is critical for Mr Hatoyama and the DPJ. Only by winning an outright majority in the Upper House can the new Prime Minister be free of the various coalitions that have hampered his first months in power.
“I believe that we have delivered all we can without compromising fiscal discipline,” Mr Hatoyama said. “Our country’s economic and employment conditions are very severe. The most important thing for us is to protect the lives of the Japanese citizens.”
The budget plan will contain Y53.4 trillion in policy spending; 51 per cent of that will go to social security programmes. This is the first time that social security has received more than half of policy spending, reflecting the new Government’s focus on jump-starting consumption rather than the big public works projects carried out by former administrations.
Tax revenues are expected to make up less than half the Government’s 2010-11 budget, falling behind new debt borrowing for the first time since the Second World War after a deep recession that devastated company profits.
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