Japan approves record budget of $940bn to accelerate economic recovery

The government expects country’s economy to grow 3.2% during the next fiscal year

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Japan's Cabinet approved on Friday an annual budget of more than $940 billion – a record for a 10th straight year – prioritising the response to battling Covid-19 and the prime minister's aim of growth and wealth distribution.

The budget of 107.6 trillion yen ($94bn) for the fiscal year that starts in April 2022 is Japan's biggest initial spending plan, underlining a priority of reviving the pandemic-hit economy over returning to long-term fiscal health.

However, when asked if heavy spending to fight the Covid-19 pandemic could force the government to alter its primary balance target, Finance Minister Shunichi Suzuki said, “I don't think so, for now.”

Mr Suzuki renewed his pledge to stick to the target, saying it was important to keep up efforts to improve public finances as the cornerstone of Japan's credibility.

Prime Minister Fumio Kishida's first budget, which parliament must approve by the end of the current fiscal year in March, comes days after the body approved 36tn yen of record extra stimulus spending to aid the Covid-19 recovery.

Bigger spending meant fiscal discipline was loosening among Japanese policymakers, who are counting on the Bank of Japan's ultra-loose monetary policy to keep borrowing costs low, analysts said.

“Politicians show no signs of making efforts to repay government debt,” said Yasunari Ueno, chief market economist at Mizuho Securities. “The lack of fiscal discipline is the biggest side effect of the BOJ's massive monetary easing.”

The budget includes 5tn yen for emergency costs of Covid-19, a record defence outlay of 5.37tn, the largest-ever welfare cost of 36.3tn and 24.3tn yen for debt servicing.

Public debt in Japan, the world's third-largest economy, is more than twice the size of its $5tn economy, the heaviest among industrialised countries.

Mr Kishida has pledged to improve public finances in the long run and the budget foresees new borrowing of 36.9 trillion yen next year – less than this year's initial plan of 43.6tn.

Lower borrowing will be replaced with higher tax revenues, seen rising for the first time in two years to a record 65.2tn yen, as Covid-19 curbs on economic activity ease.

The government estimates real economic growth of 3.2 per cent in the next fiscal year, up from a prior estimate of 2.2 per cent. The estimates form the basis for the budget plan.

But with debt still accounting for 34.3 per cent of the budget, it will be tough to achieve a primary budget surplus by fiscal year 2025/26 as the government aims to do.

The primary budget deficit, which excludes new bond sales and debt servicing, is seen at 13tn yen in the next fiscal year, higher than an estimate of 20tn for this year, but still off from the government's target.

Updated: December 25, 2021, 4:00 AM