Japan's Budget Battle is Latest in Political Showdown over Government Debt

Sources:

Asahi: Lower House Passed Budget Despite Boycott

Asahi: Conservative Merger Expected from Political Supernova

The Economist: Japan's Budget Battle: Kabuki Comes Home

FT: DPJ Rebel Suspended over Japan Budget Vote

WSJ: Japan Passes Record Budget, but Major Challenges Remain

This week, the ruling Democratic Party of Japan (DPJ) passed a $1.12 trillion government budget for 2011. Budget disputes have intensified as the Japanese government’s debt of more than $11 trillion is set to reach more than twice the country’s GDP. Debt issuances now account for nearly 50 percent of all government revenues and are a larger source of revenue than taxes. To add to the troubles, last month Standard & Poor’s lowered its rating Japan’s long-term government bonds from AA to AA-.

However, while the budget sets out the amount of money the government plans to spend for the year, to fully implement the budget, additional legislation is required to specify a source of revenues. The recent budget showdown is expected to continue for several more months because support for the implementing legislation is unlikely to gain either the necessary majority vote of the upper house of parliament, or a two-thirds majority in the lower house. Japan's new fiscal year begins April 1 and without passage of additional bond issuances, the government could run out of money by the middle of this summer.

The Prime Minister Naoto Kan argues that failing to pass the implementing legislation will threaten Japan’s slow economic recovery. Commentators suggest that Japan’s government debt and political deadlock may weaken the country’s economic competitiveness.

The recent budget woes have led to a split within the DPJ in how to manage Japan's debt and economy. Prime Minister Naoto Kan and a majority of his DPJ favors raising taxes to address the debt and decreasing trade barriers with the U.S. to improve economic performance. Others within the DPJ are calling for tax cuts, a continuance of current trade policy with the U.S., and closer economic ties with China. Sixteen lawmakers of the DPJ abstained from voting with their party, leading the newspaper Asahi Shimbun to suggest that a realignment of the political parties may be underway.