New Japanese ballooning budget raises collaps fears

Dec. 26 (Bloomberg) -- Prime Minister Yukio Hatoyama unveiled a record budget of 92.3 trillion yen ($1 trillion) aimed at increasing the wealth of Japanese households and reducing the economy’s reliance on exports.

The proposal for the fiscal year that starts April 1, released yesterday in Tokyo, said the government will sell 44.3 trillion yen of new debt to help fund a revenue shortfall.

Hatoyama’s budget, the first since his Democratic Party of Japan took office in September, reflects campaign promises to address economic stagnation by lifting the spending power of the nation’s households. Economists have criticized the plans for deepening concerns about the nation’s indebtedness and failing to address regulatory constraints on businesses.

“It’s impossible to keep tolerating this massive spending,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal health will continue to be exceedingly severe given revenue won’t grow and a stagnant recovery may require additional economic measures.”

The extra yield, or spread, on 30-year government bonds over two-year notes was at 2.11 percentage point yesterday in Tokyo. The level is near a four-year high, reflecting concerns about the government’s debt management.

The budget gap has already increased to the equivalent of 10.5 percent of gross domestic product this year from 2.5 percent two years ago, according to International Monetary Fund estimates released last month.

Total bond and note sales to the market will swell to a record 144.3 trillion yen, according to the proposal, lower than the 145 trillion yen median estimate of 15 primary dealers surveyed by Bloomberg News.

Fiscal Discipline

“The government will need to be careful about maintaining fiscal discipline or some investors may start to think government finances are heading for a collapse,” Minami said.

Japan’s expanding deficit forced the DPJ to pare back some campaign promises this week. Hatoyama abandoned plans to end a provisional gasoline tax, securing about 2.5 trillion yen.

The premier also cut about 3 trillion yen off the unprecedented 95 trillion yen in budget requests he received from ministries, restraint that analysts including Hideo Kumano say indicates he doesn’t want to lose control of the government’s finances.

“Some people have been critical of the DPJ’s change of heart,” said Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official. “But it is a sign they are now steering along a more realistic course.”

Record Cuts

Spending on public works will be cut by a record to 5.8 trillion yen, the proposal said.

The construction industry has underperformed the nation’s stock market since Hatoyama won an election on Aug. 30, with the Topix Construction Index losing 13 percent compared with a 6 percent decline in the overall Topix index. Tokyo-based Kajima Corp., Japan’s biggest builder by assets, has lost 30 percent in that period.

Hatoyama has sought to increase spending on childcare and reduce tuition costs to help bolster families’ incomes and strengthen consumer spending. Japan’s recovery from its worst postwar recession has relied on exports. GDP growth slowed to 1.3 percent in the third quarter from 2.7 percent in the previous three months.

The government estimates tax revenue will be around 37 trillion yen next year, the same as this year’s forecast. Gross domestic product will expand 1.4 percent in the period, the first expansion in three years, the government said.

Hatoyama was able to fulfill his pledge of keeping new bond sales around 44 trillion yen, the same amount issued by the previous administration.

‘Best We Could Do’

“This was the best we could do in order to maintain fiscal discipline,” the premier said at a press conference in Tokyo. “We were able to fulfill our obligation to future generations by maintaining that goal.”

Hatoyama’s popularity has dropped to 48 percent this month from 71 percent after he took the office in September, according to the Asahi Newspaper. His budget proposal must be approved by Japan’s parliament, known as the Diet, before taking effect.

Sentiment among merchants and households declined last month, when the government cited the threat of deflation for the first time in three years. Reports yesterday showed the unemployment rate rose to 5.2 percent last month, the first increase since July, and consumer prices slid for a ninth month.

Along with declining revenue, Japan’s ballooning spending results from an aging population. Social-security expenses, which have increased 63 percent since 2000, will account for more than half of general spending for the first time next year.

Japan’s finances are “in a very severe situation,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. “The DPJ’s message is that fiscal sustainability won’t recover and it won’t show a plan to improve it until the middle of next year.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBxM7erKzn5U&pos=9

 

new government old fools.

 

You would think this news would make jpy fall; but it is inching up.

 

Everythimg is relative, perhaps the problems with the Euro are being reflected in the Yen.

 

?.......'free money" in another carry-trade?

 

There's always a spread between short and long term government bonds, you're taking additional risk holding government debt for 30 years! Not really an arbitrage opportunity if that's what you were meaning.

 

Renegen, I think it is more accurate to say there is usually a spread between short and long term bonds. There have been times when those rates have been at approximate parity for short periods and even times when the yield curve "inverts" for a few months.

Most "carry trades" are not actually arbitrage plays even though they are frequently described as that. They are predicated on a given trader or institution believing that at a given cost of funds in a currency they can carry assets that either appreciate enough or throw off enough return to leave an acceptable profit given the inherent risk in the trade.

The reality is that well run desks tend to be right on the risk reward calculation and fortunes have been made on carry strategies that were well planed and executed.

That said, I would be VERY, VERY, VERY hesitant to hold Japan's long dated paper just because my overnight or 90 day rate looked good in comparison. I have little doubt that within a year or two Japan's AAA rating will be history.

I worry about US debt levels but Japan is already at the tipping point that we can't reach even in the next few years. These guys are mortgaged not just to the hilt but a bit past the hilt. We are watching a society defy gravity and we all know that has a short maturity.