EDITORIAL: Japan's massive debt

Not only the Japanese public, but also the global financial markets are eager to see the Japanese government demonstrate the political will to put a stop to its worsening finances.

The turmoil in the world economy precipitated by the Greek financial crisis has been a wake-up call for every country, warning what would happen if a national debt were allowed to keep increasing.

In terms of fiscal soundness, Japan has the worst track record among the developed nations with its heavy dependence on debt financing.

Japan has no choice but to work out a way to put itself on a path toward fiscal rehabilitation.

In this sense, we welcome Deputy Prime Minister and Finance Minister Naoto Kan's announcement that he would make an effort to keep new bond issuance for next fiscal year at or below 44.3 trillion yen ($478.92 billion).

This amount is the same as the current fiscal year's bonds, totaling about 44 trillion in the government's initial budget for the year. This was the highest amount in any initial budget this country has ever had.

Compared to the 30-trillion-yen threshold set during the Koizumi administration, 44.3 trillion yen is a weak target.

Even so, because the world economy is still recovering following the global economic crisis and Japan is in need of fiscal and monetary assistance to overcome deflation, reaching even that target will not be easy.

In addition, if the ruling Democratic Party of Japan tries to fully honor campaign promises made in last year's Lower House election, expenditures in the next fiscal budget may well grow from this year's 92 trillion yen to nearly 100 trillion yen.

On the other hand, there is not yet any prospect of a major recovery in tax revenues following a sharp drop this fiscal year to as low as 37 trillion yen as a result of the recession.

In addition, the so-called "buried money" such as funds in the government's special budgets and other accounts will have already been spent. As a result, the scale of bond issuance for next fiscal year may well go over 50 trillion yen.

Since last year, the government has made efforts to screen and prune existing projects to save money, but it has failed to produce expected results. As this example shows, it is impossible to slash wasteful spending on the order of a few trillion yen in a short time span.

Thus, to keep the bond issuance at or under 44.3 trillion yen, the government has no choice but to drastically re-examine many DPJ campaign promises, including the full payment of child allowances and making highway tolls free.

The DPJ will strongly resist such a move, but the 44.3-trillion-yen cap is necessary to prevent the country's debt from bloating even further. And yet, even that is only for the next fiscal year. Creating a solid revenue source through radical tax reform is essential if Japan's fiscal management is to gain credibility both domestically and internationally, while still paying for health and nursing care programs that are bound to expand in the coming years.

The DPJ is debating whether or not it should clearly state in its party platform its intention to raise the consumption tax rate after the next Lower House election. However, there is strong resistance to this idea for fear this will work against the party in the upcoming Upper House election.

Japan's bond rating is on par with Spain and Ireland, which face severe fiscal difficulties only second to that of Greece.

Japan's massive outstanding bonds are now accommodated by the 1,400 trillion yen worth of personal financial assets and the nation's current-account surplus, but there is no guarantee this will continue well into the future. At some point, the market could revolt with falling prices and rising interest rates.

In June, the Hatoyama administration plans to put together a medium-term fiscal framework that sets out the fiscal policy program for the next three years. It should simultaneously set forth a path toward fiscal reconstruction for the next decade or so, including plans for tax increases.

The government, which is responsible for the running of this country, cannot be allowed to continue dribbling out more and more debt while shying away from the task of raising taxes.

--The Asahi Shimbun, May 15