Japan Finance Ministry draft reveals deep rift on fiscal reform

By Takashi Umekawa and Stanley White

TOKYO (Reuters) – Advisers to Japan’s Finance Ministry have accused the Cabinet Office of making overly rosy assumptions about growth and spending, a draft document showed on Tuesday, highlighting sharp internal divisions over how to tame the country’s massive debt.

The document, reviewed by Reuters, offers a rare glimpse of in-fighting within Shinzo Abe’s government, and reflects fears within the hawkish Finance Ministry that some policymakers close to the prime minister want to backslide on fiscal spending cuts.

Japan’s debt burden is the heaviest in the developed world, at more than twice the size of its $5 trillion dollar economy. The government is scheduled to present a final version of a plan to lower public debt next month.

The Cabinet Office last week laid out a plan to shift fiscal policy away from spending cuts and focus more on stimulating growth to boost tax revenue and lower outstanding debt.

But the Finance Ministry document, which will be presented to Finance Minister Taro Aso later this month and form the basis of his policy stance, said Cabinet Office assumptions about the pace at which Tokyo can afford to increase healthcare spending were unrealistic and weakened the political will to implement painful fiscal reform.

Using unusually strong language, the draft also accuses Cabinet Office advisers of a “misunderstanding” in their assumption that Japan can easily lower its debt-to-GDP ratio because interest rates will remain extremely low for years.

The risk, however, is that bond yields start to rise due to worries that fiscal spending will spiral out of control, which would complicate the Bank of Japan’s government debt purchases for its quantitative easing program.


Last week academics on the Council on Economic and Fiscal Policy (CEFP), a Cabinet Office panel, confirmed their support for the government’s target of returning to a primary surplus – or a surplus before debt servicing costs – in fiscal 2020 and thereafter lowering the debt-to-GDP ratio.

The panel also came out strongly against deep spending cuts, however, which marked a dramatic shift in policy.

This has alarmed for some economists, because the views of the academics on the CEFP are considered close to Japanese Prime Minister Shinzo Abe’s thinking.

Since Abe took office in late 2012, the Cabinet Office and its advisers have steadily increased their influence on fiscal policy, an area which the Finance Ministry traditionally dominated.

The Cabinet Office wants to forecast a gradual decline in the debt-to-GDP ratio out to fiscal 2025, but realizes this would only be possible if interest rates remained very low, several government sources told Reuters.

As a result, the Cabinet Office is prepared to issue long-term fiscal forecasts at the end of July based on the assumption that the BOJ’s unprecedented monetary easing remains in place, the sources said.

The Finance Ministry is also aware of this plan, because its advisers warned that bond yields would rise assuming the central bank achieved its goal of pulling Japan out of deflation, the draft showed.

(Additional reporting by Izumi Nakagawa; Editing by Alex Richardson)

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