The Suga cabinet approved its draft FY2021 budget on Monday, 21 December, which for the third-straight year topped JPY 100tn (USD 966.6bn), climbing to a record high of roughly JPY 106tn (USD 1.02tn). While the top priority is providing fiscal stimulus for Japan’s Covid-19-stricken economy, the budget is Prime Minister Yoshihide Suga’s first opportunity to shape public spending to reflect his policy priorities. Additional support will be provided by the JPY 19.2tn (USD 185.6bn) third FY2020 supplemental budget that will be submitted to the Diet in January.
To this end, the budget includes JPY 2tn (USD 19.3bn) towards a green technology fund as outlined in the stimulus package. It also includes funding for a new digital affairs agency that will be set up by September 2021 and to promote wider use of the “My Number” personal identification system. Beyond the creation of a new agency, the digital transformation (DX) agenda will affect spending throughout the government, including, for example, initiatives to digitize education and reduce class sizes; boost agricultural exports; promote tourism; and streamline the provision of services at the local level.
However, what is most notable about the budget is that despite the increase in its overall size, virtually all of the increase will come from a JPY 5tn (USD 48.3bn) appropriation for a Covid-19 reserve fund that will cover various initiatives to reinforce the healthcare system. Social security-related expenditures will grow by JPY 150.7bn (USD 1.5bn), while all other discretionary expenditures will grow by only JPY 33bn (USD 319mn). The public works budget was unchanged. Defense spending will reach a new high for the seventh straight year, but the increase will be only JPY 61bn (USD 589.7mn), with additional spending going towards the development of new missiles and a next-generation fighter. Other budget lines will see smaller increases or otherwise remain unchanged. That said, the government’s ordinary spending will be supplemented by a record-large Fiscal Investment and Loan Program (FILP) plan for FY2021, totaling JPY 40.9tn (USD 395.4bn), three times larger than the original FY2020 plan (which also surged along with the government’s regular spending).
Despite fairly modest increases outside of Covid-19 emergency funds, the government will run a significantly larger deficit in FY2021. The government forecasts that tax revenues will fall by 9.5% and reach their lowest level in 11 years, while new Japanese government bond issuance will raise to JPY 43.6tn (USD 421.4bn), the highest level since the Global Financial Crisis. While these figures will be considerably smaller than the ultimate levels after the three supplemental budgets – once the third supplemental budget passes, the Japanese government will issue JPY 112.5tn (USD 1.1tn) in new JGBs in FY2020 – the new budget indicates that fiscal consolidation will be an increasingly distant goal.
The government’s larger deficits will make it difficult for the Bank of Japan (BOJ) to scale back its easing program for the foreseeable future. BOJ Governor Haruhiko Kuroda announced another policy review on 19 December after the BOJ’s latest policy board meeting – and extended an emergency corporate loan program – and suggested that depending on the review, the bank could roll out additional stimulus policies in the future. The slowing pace of inflation and a strengthening yen suggest that the BOJ could be busier in 2021.