A fresh warning on Japan's government bond rating underscored the daunting task of rebuilding public finances while funding post-quake reconstruction.
A fresh warning on Japan's government bond rating underscored the daunting task of rebuilding public finances while funding post-quake reconstruction.
Standard and Poor's on April 27 cut its outlook for Japan's long-term rating, saying that 20 trillion yen to 50 trillion yen ($250 billion to $610 billion) will be needed to rebuild following the March 11 Great East Japan Earthquake.
The government plans to issue bonds in its fiscal 2011 second supplementary budget to finance long-term reconstruction measures. It wants to raise taxes to redeem those bonds.
While Prime Minister Naoto Kan intends to raise the consumption tax, opposition to the move is growing louder even among his supporters in the Democratic Party of Japan.
Standard and Poor's analyst Takahira Ogawa said the U.S. credit rating agency will closely examine the package of tax and social security reforms the Kan government plans to compile in June.
"The government appears to be focusing on dealing with the earthquake, but mid- to long-term measures to rebuild state finances are the most important to Japan's sovereign credit rating," he said April 27.
The central and local governments are projected to have nearly 900 trillion yen in outstanding debt by March 2012.
Of key government outlays, social security expenditures are growing at a pace of 1 trillion yen a year as the population ages.
Finance Minister Yoshihiko Noda said April 27 only that, "Recovery and reconstruction from the earthquake are a key policy issue. At the same time, Japan cannot bypass efforts to improve its fiscal health. We will try to achieve both goals."
Standard and Poor's said it had revised its outlook for Japan's long-term rating from "stable" to "negative," meaning there is a one-third or greater possibility that the rating will be lowered between six months and two years from now.
It said Japan's fiscal condition could deteriorate due to the volatile situation surrounding the crippled Fukushima No. 1 nuclear power plant, in addition to reconstruction costs.
Standard and Poor's in January lowered Japan's long-term sovereign credit rating by one notch to "AA-," fourth from the top.
It reaffirmed that rating April 27, but warned that it could be further downgraded if the government fails to come up with specific measures to rebuild its finances.
"Much will depend on Japan's political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future," the agency said.
Investors are moving to hedge against the risk of falling government bond prices, according to a senior government official.
"To reduce risks of holding government bonds for a long time, some domestic financial institutions are increasing their holdings of shorter-term instruments," the official said.
In January, Standard and Poor's warned that a "twisted" Diet would hamper efforts by the Kan government to rebuild its finances.
Diet deliberations have since proceeded largely in line with that scenario.
While the fiscal 2011 budget passed the Diet, more than 40 percent of its revenue has not been secured as opposition parties stalled a bill that would enable the issue of deficit-covering bonds.
More than 90 percent of Japan's government bonds are owned by domestic institutional investors, such as banks and life insurance companies.
At a meeting called by the Finance Ministry on April 21, officials from banks and life insurers said it will be difficult to dispel market concerns about government bonds unless new bonds to finance reconstruction measures are paid for with tax increases.
The outlook is far from certain, however.
Opposition to tax increases for reconstruction is spreading from opposition parties and anti-Kan forces in the DPJ to the DPJ lawmakers who support the prime minister.
At a meeting of an all-party group on measures to end deflation on April 27, former Environment Minister Sakihito Ozawa said the government should not burden the economy with tax increases.
Ozawa's remark carries weight because he chairs the DPJ project team on tax revisions, which is expected to discuss ways to fund reconstruction.
On the same day, 45 first-term DPJ lawmakers held an emergency meeting to call for reconstruction without tax increases.
The first-timers, who lack a solid constituency, are concerned that unpopular tax increases could hurt their re-election chances.
At a meeting on the simultaneous tax and social security reforms on April 27, Kan said his government is committed to putting together its proposals.
"How to finance social security costs was a key policy issue even before the earthquake," he said. "We will work on recovery and reconstruction, but we want to find a way to address both of these challenges."
But the March 11 disaster drastically altered key preconditions.
If the consumption tax is increased, the revenue would first go to reconstruction, and it is unclear how much would be left for social security.