Bloomberg News Online reported on December 22, 2013 that the Japanese government has unveiled the latest draft of the country’s 2014 Budget plan, calling for a Japanese Yen (JPY) 95.88 trillion (USD 921.00 million) spending proposal that will focus on social security funding, defence, and public works. The budget is timed with the expected consumption tax hike from the current 5.00 percent to 8.00 percent, set to kick in on April 01, 2014. The country’s finance minister, Mr. Taro Aso, spoke to reporters and has indicated that revenue bonds worth approximately JPY 41.25 trillion are expected to be issued, which is less than the planned JPY 42.90 trillion set aside for the 2013 budget.
The release of the latest budget for the fiscal year 2014 starting on April 01 offered some insights on how ‘Abenomics’ is progressing in its second year. The latest release of the government spending plans aimed to focus on ending the decades-old deflationary cycle, and focus more towards the structural reforms under the so-called ‘Three Arrows’ (fiscal, monetary, and structural reforms). The lack of a detailed plan coming from Prime Minister Shinzo Abe on how the Japanese government plans to tackle its aging population, boost female workforce participation rates, boosting labour productivity levels, among others, have turned out to be impediments towards Japan’s continued recovery since PM Abe took office in early 2013. However, in order to boost government spending levels, there has to be a detailed deficit reduction plan which will tie with the overall spending limits. It is a dilemma facing many Japanese policy makers as they are coping with an increasingly aging workforce, and the lack of foreign talent to fill the void in terms of the rate of replacements needed to sustain the country’s economic growth. The proposed budget aims to halve the primary balance deficit by fiscal 2015, and achieve a surplus by 2020. However, sceptics have warned about the possibility that the Japanese government might not be able fulfil its budget reduction goals, given that there are still issues, namely labour reforms, which are expected to occupy much of the policy debates facing lawmakers come 2015.
According to Bloomberg News, there have been many concerns expressed by many market observers, namely the stubbornly low annualised Gross Domestic Output (GDP) rates, which could pose some challenges to the timing of the increase in the consumption tax rates to 8.00 percent come April 2014. One of the reasons for the proposed plan to raise consumption taxes is to help reduce the ongoing double digit government debt levels, relative to annualised GDP. With the slowdown in the annualised GDP growth levels, coupled with the slow wage growth, consumers might start to reduce spending levels in anticipation of the rate hike on April 01, 2014. In addition, with the less than robust spending coming from the expected consumption rate hike, there are questions as to how the Japanese government will be able to raise its inflation forecasts to at least 2.00 percent, which is also a target set by the country’s central bank, Bank of Japan (BOJ)? In the latest July-September 2013 reading of the country’s economic growth level, annualised GDP growth came in at 1.9 percent, which is less than the 3.8 percent achieved in the prior quarter, and relatively in line with the expected 1.7 percent for the period. Critics have warned that the anaemic economic growth conditions could add to more headwinds to Prime Minster Abe’s drive towards reviving the world’s third largest economy.
Bloomberg News have reportedly received the draft documents of the 2014 budget proposal on the previous day, which indicated that the proposed issuance of the revenue bond sales is expected to fund approximately 43.00 percent of the budget, compared to the anticipated 46.30 percent in 2013. Debt servicing costs, including interest payments for outstanding bond issuance is expected to rise to JPY 23.30 trillion from the JPY 22.20 trillion in 2013. Mr. Taro Aso has also indicated that Japan’s primary deficit will improve by JPY 5.20 trillion in 2014, and tax revenue is estimated to increase to JPY 50.00 trillion, as compared to the JPY 43.00 trillion outlined in the 2013 budget. The increase in government spending levels in 2014 posed some questions as to whether the Japanese government is able to fulfil its target of reaching a budget surplus by 2020.
The unveiling of the latest 2014 budget proposals by the Japanese government offers many insights on how policy makers plan to tackle various economic issues, including the continuing deflationary conditions, and the progress towards reaching budget surplus by 2020. There are questions as to whether in 2014 and beyond, is the Japanese government merely trying to outline its grand plan on how it will go about in reviving the country’s growth targets, or are they setting themselves up for disappointments when the results will only show tepid improvements, rather than earth shattering economic growth levels expected in the future.