TOKYO (Reuters) - Japan’s ruling party lawmakers on Wednesday piled pressure on the government to compile a big spending package, increasing the chance fiscal policy could play a bigger role in sustaining a fragile economic recovery with the risk of more debt issuance.
Hiroshi Moriyama, a senior lawmaker of the ruling Liberal Democratic Party (LDP), told reporters on Wednesday he believed the government was striving to compile a supplementary budget sized around 10 trillion yen (71.71 billion pounds) - a size floated by several of his colleagues earlier this month.
“I want (the government) to compile it taking downside risks to the economy fully into account,” Moriyama said on the extra budget that is now being worked out by the government.
With tax revenues seen undershooting the government’s forecast this year, calls for bigger fiscal spending heighten the chance Japan will issue more bonds and further delay progress in reining in its huge public debt, analysts say.
Katsutoshi Inadome, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities reckoned it could result in bond issuance to cover the 2020 defict reaching a six-year high.
There is no consensus within the LDP, however, on whether to fund the 10-trillion-yen package just with the supplementary budget for the current fiscal year ending in March 2020, or to spread the bill between the supplementary budget and next fiscal year’s annual state budget.
In a proposal to the government finalised on Tuesday, the LDP called for spending sized around $92 trillion yen to be spread over the next fiscal year, thereby reducing the size of the supplementary budget.
The package proposed by the LDP calls for steps for disaster relief, as well as spending on infrastructure building, steps to boost small firms’ productivity and aid to farmers bracing for effects of a trade deal with the United States.
Japan’s economic growth slumped to its weakest in a year in the third quarter as soft global demand knocked exports, heightening political calls for big fiscal spending to stave off the risk of a recession.
The International Monetary Fund also endorsed more spending to prop up growth, saying fiscal policy can complement the Bank of Japan’s effort to support the economy.
Ministry of Finance officials - fearful of worsening Japan’s already tattered finances - downplay the chance of big spending, saying the total amount will not be finalised until details on the components of the package become clear.
While government officials remain mum on whether the package would require issuing more government bonds, some politicians have said said it will.
More issuance of super-long government bonds would be welcome news for the BOJ, which is struggling to prevent its ultra-easy policy from flattening the yield curve, and for investors desperately searching for higher yields.
Given the Bank of Japan’s success in keeping yields ultra-low, many analysts are taking the risk of more debt issuance in stride.
“The market does not see more debt issuance involved in this economic package as a market-moving factor,” said Yasunari Ueno, chief market economist at Mizuho Securities. “The BOJ’s monetary easing will help prevent any harmful rise in interest rates.”
Additional reporting by Leika Kihara; Editing by Simon Cameron-Moore