REPEAT; MNI ANALYSIS: Japan Mired in CPI, Debt Rolling Targets

By Max Sato

     TOKYO (MNI) - Japan's government and central bank are expected to remain

stuck with elusive targets of balancing the budget and anchoring 2% inflation,

failing to set creditable timeframes and risking a vicious circle of too much

policy stimulus.

     The government has pushed back its oft-delayed target of achieving a

primary fiscal surplus -- in which the government can fully cover policy

expenditures, excluding debt-servicing costs, with its own tax revenues -- by

five years to 2025.

     --OPTIMISTIC FISCAL TARGET

     Critics say that is still too optimistic an outlook as long as the

government keeps trying to bring in higher tax revenues by using additional

fiscal stimulus to boost growth.

     Amid the shrinking working population, Japan's economy has posted a modest

recovery, limiting tax revenue growth.

     This is despite five years of aggressive monetary easing, increased fiscal

spending and structural reform plans under Prime Minister Shinzo Abe, who

returned to power in late 2012.

     Slow progress in fiscal consolidation is also due to Abe's decision to

twice postpone the plan to hike the 8% sales tax to 10%, until October 2019, a

move criticized by opposition leaders as political gambits just before Abe

called a snap election each time.

     The ratio of the primary budget deficit to gross domestic product was 2.9%

in fiscal 2015, when the government managed to halve the deficit as planned, but

it has since failed to make any progress.

     --SLOW PROGRESS

     Japan Research Institute economists note that the Abe government's backdoor

spending is worsening the fiscal position, a factor that is making households

worry about the sustainability of public pensions and medical services, and thus

cautious about spending.

     JRI estimates that the Abe administration has spent a total of Y29.6

trillion to finance supplementary budgets, worsening the primary deficit by Y2.5

trillion and its ratio to GDP by 0.4 percentage point, compared to the effects

of slow nominal GDP growth (Y4.3 trillion, 0.8 point) and the delayed sales tax

hike (Y4.1 trillion, 0.7 point).

     "The government has been using supplementary budgets and special accounts

to support economic growth, which has kept it from making progress in fiscal

consolidation," said Kenji Yumoto, chief senior economist at the Japan Research

Institute. "I think the new timeframe -- by 2025 -- will also end up being a

rolling target."

     --POLITICAL DONATIONS 

     The slow progress in structural reforms is also weakening fiscal

discipline. Doctors remain a powerful lobby, resisting cuts in medical service

fees, while politicians are cautious about slashing public pension payouts as

seniors remain a big voter group across the ridings.

     Political donations from firms and industry groups rose to Y2.7 billion in

2016, up 3% from the previous year, most of which went to the ruling Liberal

Democratic Party. Along with automakers and banks, the national group

representing medical doctors made a substantial donation.

     "Like in Sweden, Japan should ban political donations from businesses,"

Yumoto said.

     The Bank of Japan is keeping borrowing costs low with a near flat yield

curve and massive asset purchases, keeping the yen relatively weak and

supporting exporter profits while pushing up import costs. It has also helped

limit the government's debt servicing costs.

     The incentive to cut debt is also weak as about 90% of Japan's government

debt is held by domestic investors.

     "I suspect by 2035, the share of foreign investors in JGBs may grow to

match that of domestic investors. If the BOJ tries to exit from easing around

that time, it may become difficult to keep long-term rates from rising sharply,"

Yumoto warned.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com