Japan Government Considers Paring Election Pledges

By Keiko Ujikane and Kyoko Shimodoi

Nov. 17 (Bloomberg) -- Japan’s government is considering trimming some of its campaign spending pledges to prevent an increase in debt issuance next year that might send yields higher and damp the economic recovery.

Finance Minister Hirohisa Fujii told parliament today the government may cut back on its election promises, determined to hold debt sales for the next financial year at 44 trillion yen ($494 billion). He told reporters earlier in Tokyo that issuance beyond that amount next year would be a “big problem.”

The shift indicates the five-week bond sell-off that ended last week unnerved the ruling Democratic Party of Japan enough to risk walking back from some of its platform. Vice ministers will meet this week to prioritize pledges that include reduced tuition fees, a childcare allowance and end to a gasoline surtax, Vice Finance Minister Yoshihiko Noda said on his Web site.

“The 44 trillion yen pledge has become a magic number for the DPJ” to gain trust from voters, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Given that yields have been rising, the government has become sensitive about bond sales and the number is becoming even more politically significant.”

Benchmark 10-year bond yields climbed to 1.485 percent by Nov. 11 from 1.31 percent before the Aug. 30 election. Fujii said last week that he was “very concerned” about the increase in yields. The securities have recouped some of those losses, trading at 1.305 percent as of 3:32 p.m. in Tokyo.

Investor Focus

Noda, a DPJ lawmaker, said in a Nov. 15 comment on his Web site that “we really have to keep bond sales next year below 44 trillion yen,” referring to the debt used for the shortfall of revenue compared with spending. Fujii said the bond market is focusing on that cap.

“We will implement things that we pledged during the election campaign, but perhaps the amount could be reduced,” Fujii said at the Diet. Prime Minister Yukio Hatoyama’s government previously estimated it needed 7.1 trillion yen to pay for the programs in the fiscal year that begins April 1.

Asked if the administration would reduce the 7.1 trillion yen amount, Fujii told reporters today that “a reduction is possible, of course.”

While Fujii is stressing fiscal restraint, Deputy Prime Minister Naoto Kan said today the government is preparing a spending package to make sure the country doesn’t slip into another recession.

Second Extra Budget

“We’ll compile a second extra budget to ensure the economy won’t have a second bottom,” Kan said. The Cabinet said the measures for the year ending March 31 will focus on support for workers and the environment, without specifying a figure.

The world’s second-largest economy grew at an annual 4.8 percent pace last quarter, the quickest expansion in more than two years, the Cabinet Office said yesterday. The report also showed a slide in prices deepened, highlighting the risk that deflation may undermine the recovery.

The rebound from the country’s worst postwar recession hasn’t been strong enough to lift tax revenue. Tax receipts may drop as low as 37 trillion yen this fiscal year, 20 percent below the projected amount, according to two Finance Ministry officials who spoke on the condition of anonymity.

Japan’s debt burden, already the world’s largest, will climb to twice the size of the economy next year, according to the Organization for Economic Cooperation and Development.

Voter Unease

Voters have expressed unease with the government’s spending plans, with a Yomiuri newspaper survey this month showing that 85 percent of respondents would prefer to have it postpone some election pledges rather than increase bond sales.

Sumitomo Mitsui Asset’s Muto said the government may need to postpone its pledges to abolish a gasoline surcharge or reduce the amount of childcare allowance. The government will lose about 2.5 trillion yen in revenue if it scraps the tax.

Government departments last month asked a record 95 trillion yen of budget requests for the next fiscal year. Yoshito Sengoku, a minister charged with reallocating public finances, said in October that he would want to cut budget requests to below 92 trillion yen.

Higher bond sales would also heighten the risk of a cut in Japan’s sovereign debt rating, analysts said.

David Riley, head of sovereign ratings for Fitch Ratings in London, said last week the company may review Japan’s fiscal position after the government releases its fiscal 2010 budget and bond sales plan. He declined to say whether it cut the country’s AA- grade.

Some analysts, including Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, said it’s more important to keep boosting the economy than to rein in bond sales. Kiuchi said Japan may fall back into a recession in the second quarter of 2010 and the government may need to compile stimulus measures before upper-house elections in July.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net