Japan sets ambitious fiscal goals, eyes tax hike

Japan set ambitious targets to rein in its debt on Tuesday but admitted they would not be met even under its rosiest growth scenario, setting the stage for politically contentious tax hikes.

Prime minister Naoto Kan has made fiscal reform a top priority ahead of a July 11 upper house election, vowing to consider doubling the 5% sales tax, although not for at least two or three years.

The government is hoping to keep the support of investors longer term and avoid a credit ratings downgrade with a credible fiscal plan.

"We must prevent a situation like Greece, where Japan loses the confidence of bond markets, pushing interest rates higher and leading its finances into a state of collapse," the plan said.

The plan lacked specific ideas of how to meet its long-term aim of achieving budget balance targets and reducing its debt-to-GDP ratio -- now estimated at nearly twice the size of GDP, the worst in the developed world.

In the plan, the government pledged to do its utmost to keep new debt issuance in the year to next March at or below about the 44 trillion yen ($483 billion) that has been earmarked for this year, while aiming to steadily reduce bond issuance thereafter.

The plan calls for Japan to bring primary budget balance into the black within a decade. The balance excludes revenue from bond sales and debt-servicing costs.

To achieve this, the government said it will halve Japan's primary budget deficit -- now estimated at 30.8 trillion yen, or 6.4% of GDP -- by the fiscal year from April 2015.

From fiscal 202122 the government will aim to stably lower the debt-to-GDP ratio.

But the cabinet office estimated that neither the budget balance nor the debt-GDP ratio goals could be met under the government's growth strategy, which calls for an average 2% real growth by fiscal 2020-21.

Under the average 2% growth scenario, the primary balance deficit is still estimated at 13.7 trillion yen, or 2.1% of GDP in fiscal 2020-21, while the debt-GDP ratio will exceed 190%, with outstanding public debt topping 1,270 trillion yen.

In the plan, the government also set a cap of around 71 trillion yen on policy-related expenditures, including general spending and payouts to regional governments, in each of the three years from fiscal 2011-12.

The plan said the government will adopt a pay-as-you-go strategy for fiscal policy to ensure it secures stable revenue ources in case it implements new policy steps that require more spending or revenue cuts.

The timeframe of fiscal targets in the plan may change if an economic crisis occurs and makes it harder to achieve them, the plan said.