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Friday October 16, 11:50 AM
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Japan govt gets reality check on spending, funds
By Linda Sieg and Stanley White
TOKYO (Reuters) - Japanese Prime Minister Yukio Hatoyama's new government got a harsh reality check on Friday as requests for funds for ambitious new spending programmes came up against the country's huge debt and expected revenue shortfalls.
Concerns the government will have to borrow more to fund its programmes aimed at putting more money in the hands of consumers and to cover a gap in tax revenues due to a recession helped push up Japanese government bond yields, with the five-year yield hitting its highest in almost two months.
The Democrats took power a month ago after defeating their long-dominant rivals in an election marked by a pledge to end the practice of bureaucrats compiling budgets by adding up projects and presenting the total to politicians for rubber stamping.
Critics have said that resulted in policies and spending programmes that reflected the priorities of individual ministries rather than a comprehensive vision outlined by political leaders.
But Hatoyama's cabinet ministers, who on Thursday presented what Japanese media said were record requests totaling more than 90 trillion yen for fiscal 2010/11 from April, have yet to demonstrate that they can do much better.
"I think the perception that the new government is spending like crazy without seeing the source of the money will be sufficiently worrisome that the government will have to do something," said Sophia University professor Koichi Nakano.
"It may not be too late. The budget process has only started ... There is still room for a reassertion of central leadership."
Finance Minister Hirohisa Fujii told reporters he wanted to limit bond issuance in the 2010/11 fiscal year from April to below the 44 trillion yen earmarked for this fiscal year.
But the goal looked increasingly in doubt given the size of initial requests by individual ministries, which include 7.1 trillion for promised programmes such as child allowances and an end to a gasoline surcharge.
KEEPING PROMISES
The government will make an official announcement on budget requests for 2010/11 later on Friday.
Hatoyama now faces the tough task of keeping key campaign pledges without fanning fears in financial markets and among the public about further inflating a public debt that is already nearly 200 percent of GDP, the biggest among advanced nations.
"It is absolutely vital that we keep our campaign promises, because trust in the government is essential," Fujii said after a cabinet meeting.
"The message I left with other cabinet members is that they should cut what's not necessary but spend money on what we need."
Hatoyama has come under fire among some analysts and media for failing to articulate a vision that will allow the government to set priorities and make tough spending decisions.
And National Strategy Minister Naoto Kan, who heads a new body charged with overseeing the budget process along with the finance minister, has so far been mostly absent from the debate.
"They need to send out the message that Hatoyama and Kan are on top of things and know what they are doing, but they haven't done that," Nakano said.
Kan on Friday echoed Fujii's call to keep new debt issuance below last year's level, but stressed that planned changes in the content of the budget were as important as its overall size.
"What is most important now is that the content (of the budget) is changing from 'concrete to people'," he said, echoing a Democratic Party campaign slogan.
Fujii said the cabinet had found 2.9 trillion yen in wasteful spending in an extra budget compiled by the last government that could be reallocated for new programmes. But the government's task is complicated by falling tax revenues that Japanese media said could leave a 6 trillion yen shortfall this fiscal year.
Japan's economy rebounded in April-June from the worst recession since World War Two thanks to stimulus worldwide.
But economists worry that once the effect of stimulus fades, the recovery will peter out, while plans to sharply reduce public works projects as a way to reallocate funds may push Japan's economy back into recession, at least temporarily.
A high jobless rate and falling wages also threaten to keep consumption weak. Kan said the government would compile measures by Oct. 23 to boost employment using funds the government already has at its disposal from the extra budget.
The unemployment rate fell unexpectedly to 5.5 percent in August from a record high 5.7 percent in July, but job availability remained at a record low, and analysts said the rate may still increase.
(Additional reporting by Yoko Kubota and Rie Ishiguro; Editing by Hugh Lawson)
