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Langley Esquire Suga Budget

Follow the Money: Understanding Suga's Priorities in Japan's Next Record Budget

DATE: December 17th, 2020.

Japan’s Ministry of Finance will soon release the budget for the fiscal year that begins next April. The spending package has taken on added significance with the new coronavirus pandemic weighing on the economy. The budget will also offer a look at how seriously the Suga administration is pursuing its stated priorities, such as advancing digitization and advanced communications.

The budget acts as a statement of the administration’s policy priorities. Last year the government focused on education, spending more than ¥885 billion ($8.5 billion at current exchange rates) to make early childhood education free for children age three to five, and 527 billion yen to expand access to higher education to students from low-income households.

This year’s budget will focus on measures to combat the new coronavirus pandemic. The Finance Ministry, which typically seeks to restrain additional spending, told other government agencies that it would not apply its usual budget caps to measures aimed at mitigating the pandemic.

The budget will also address one of the Suga administration’s top priorities – the digitization of government services. Government ministries are requesting significantly more funds to digitize their work. The Ministry of Internal Affairs and Communications is asking for about five times more funds than the current fiscal year to promote digital transformation at local governments, as well as increase the functionality of the My Number identification card. The Ministry of Economy, Trade and Industry is asking for nearly double its current budget to promote digitization at businesses.

Japan’s budgets have steadily grown larger over the past nine years, and fiscal 2021 is no exception. Media reports indicate the budget could top 105 trillion yen, a significant jump from fiscal 2020’s 102.66-trillion-yen budget. Much of the increase is expected to be additional measures to mitigate the impact of the new coronavirus.

Japan’s public finances are in shoddy shape. The country’s gross debt is more than 266% the size of its gross domestic product, according to the International Monetary Fund, the highest among developed countries. The Finance Ministry has tried to ratchet down spending, in part by cutting drug prices and asking seniors to pay more out of pocket for their medical care, but the Abe administration long eschewed politically painful cuts to spending on healthcare or pensions.

LE GDP
© IMF https://www.imf.org/external/datamapper/datasets

However, Japan is at very little risk of any kind of fiscal crisis. Economists have generally come to accept that developed countries that control their own currency can maintain much larger debt burdens than previously thought. Moreover, most of the deficit-finance bonds issued by the Finance Ministry are purchased by the Bank of Japan, and there is no risk that the government’s own central bank will try to manipulate the price of government bonds for profit.

Policymakers are well aware of Japan’s fiscal position, and for years they have sought to bring the country’s primary balance, the difference between government revenue and spending excluding interest payments on debt, into surplus. They have mainly tried to accomplish this by growing tax revenue through growth-oriented policies, rather than curtailing spending. However, with the pandemic hitting the economy, tax revenue for fiscal 2020 is expected to be much less than the government’s initial projections, and a primary balance surplus remains a distant target.

If you are interested in a detailed look at Japan’s public spending and analysis about what it means for public policy, please contact us. Our team of analysts and researchers can assess what the government’s regular and extra budgets can mean for you and your business.

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