Japan for record budget spending, major financial reforms in doubt

Budget requests from Japan’s ministries have hit a record amount for the next fiscal year starting in April, the finance ministry said, highlighting the conflicting need to promote financial reforms while propping up a flagging economy facing external risks.

Fiscal reforms are an urgent task for Japan, which is saddled with the industrial world’s heaviest public debt at more than twice the size of its $5 trillion economy.

However, Prime Minister Shinzo Abe’s government has loosened its grip on fiscal spending as the central bank’s easy money policy effectively helps finance a massive debt.

The general-account spending requests for fiscal 2020 totalled a record 105 trillion yen ($996.30 billion), exceeding the previous high of 102.8 trillion yen sought for the current fiscal year.

The rise was due to bulging welfare costs to support the ageing population, spending to service debt, and rising military outlays in response to China’s growing military presence and North Korea’s missile programme.

“To sustain public finances for the next generation, we need to manage both economic revival and fiscal reform,” Kenichiro Ueno, a state minister of finance told reporters.

“We will do the utmost to scrutinise the budget requests so as not to be criticised as loosening fiscal discipline.”

The finance ministry will examine the requests and finalise the size of spending in December when it drafts the budget for fiscal 2020.

Abe’s government is set to proceed with a twice-delayed nationwide sales tax hike to 10% from 8% next month to pay for the cost of social welfare and fix tattered public finances. The last tax hike in 2014 hit consumers hard and caused deep downturn.

The initial budget for the current fiscal year amounts to 101.5 trillion yen, with social security and debt-servicing accounting for more than half the overall spending plan.

The finance ministry is seeking 24.97 trillion yen to pay for debt-servicing costs for fiscal 2020.

The Ministry of Defence called for spending to rise 1.2% to a record 5.32 trillion yen for fiscal 2020 to pay for US-made interceptor missiles, stealth fighters, and other equipment it wants to counter threats from North Korea and China.

Meanwhile, Japanese shares closed at their highest in more than a month on Thursday as investors cheered the announcement that US-China trade talks will resume and news from Britain and Hong Kong that also improved risk appetites.

The benchmark Nikkei average ended the day up 2.12% at 21,085.94, the highest close since Aug. 2. During the day, it touched 21,164.61, also a peak since Aug.2.

On the Nikkei index, there were 207 advancers and 18 decliners.

Japanese shares were boosted after Beijing said China and the United States agreed to hold trade talks in Washington in early October.

The market was already on a solid footing after Hong Kong leader Carrie Lam on Wednesday withdrew an extradition bill that triggered months of sometimes violent protests and as British lawmakers voted to prevent a no-deal Brexit on Oct. 31.

“There was a variety of positive factors for the market, with the news of Sino-US trade negotiations having a notably big impact,” said Hiroaki Kuramochi, chief market analyst at Capital Partners Securities.

All of the Tokyo Stock Exchange’s 33 subsectors were in positive territory as the market attracted hefty purchases across the board.

Cyclical sectors were particularly in demand, with precision machinery and sea transport the top two performing subindexes on the broader Topix, up 3.73% and 3.72%, respectively. The broader Topix added 1.84% to 1,534.46.

Other notable movers included the TSE REIT index, edging up 0.44% to a fresh 12-year high.

Medical-related service provider M3 Inc soared 10% and baseball stadium operator Tokyo Dome Corp fell 8.4% after index provider Nikkei announced it will drop the latter from the Nikkei 225 share average and replace it with the former, from Oct 1.

Candidates that did not make the index list slipped. Kakaku.com, Zozo and Nintendo shed 5.4%, 1% and 1.5%, respectively.

Nissan Motor gained 2% despite media reports quoting its chief executive as admitting to improperly receiving stock-related compensation, in the latest case of financial misconduct among executives at Japan’s second-largest automaker.

The stocks that gained the most among the top 30 core Topix names were Hitachi Ltd which gained 5.1%, followed by Shin-Etsu Chemical’s 4.7% rise.

The underperformers among the Topix 30 were Nintendo, which lost 1.5%, followed by Nippon Telegraph and Telephone Corporation, which declined 0.8%.

Reuters