Monday, 26 December 2011

Review of Japan's Public Finance 2011

People walking passby electronic stock trading board in Tokyo.

Display of 10,000 yen note in Money Museum in Tokyo

Even though some European countries are struggling with public debts and other economic woes, economic recovery is back on track for developed countries and emerging economies after the global economic and financial crisis started in late 2008. So does Japan. However, Japan’s government is currently facing many challenges such as budget deficit, over-expenditure, declining revenue, recent appreciation of the Yen, and deflation, which make it very difficult for the economic recovery from the world financial crisis. The change of government from Liberal Democratic Party (LDP) to Democratic Party of Japan (DPJ) also complicates these crises since there is a lack of continuity, and the introduction of new strategies and reforms by the new government which, to some extent, has negative impact on overall economic activities. DPJ administration has made some reorganization of government structure and laid out some reforms on national budget and public expenditure in order to keep its promise made during the election campaign. All of these challenges by the national government have put Ministry of Finance in the forefront as there are a lot of works to do with budget making and resubmission of budget in aligning with the target set by the Cabinet. In general, Ministry of Finance play major role in financial matters and budget planning, and cooperation with major international banks in the world, such as World Bank and Asian Development Bank (ADB). In order to touch upon the financial issue of Japan’s government and also responsibilities of Ministry of Finance, I am going to provide my briefing and analysis on financial reforms as follows:

I.                   Organization of Ministry of Finance

According to the organizational structure, Ministry of Finance consists of Minister’s secretariat, Budget Bureau, Tax Bureau, Customs and Tariff Bureau, Financial Bureau, and International Bureau. Two Bureaus are worth mentioned in this article, namely Budget Bureau and International Bureau, which is heart of budget’s allocation in Japan and its development activities in many countries in the world. Budget Bureau is responsible for planning, drafting and consolidation of budget system, settlement of accounts system and accounting system. For International Bureau, its main responsibilities are investigation, planning and drafting of matters concerning foreign exchange and international monetary systems and their stability, adjustment of balance of payments, economic cooperation and development with international organizations such as World Bank (WB) and Asian Development Bank (ADB), and dealing with matters concerning overseas loans and investments, etc.

II.                Re-organization of the Japanese Government and Reform of Budget process
In recent years, DPJ Government has made some structural reorganization in order to improve the government’s capacity and performance. In line with this, the Council on Economic and Fiscal Policy, previously in charge of formulating important economic and fiscal policies, was replaced by National Policy Unit and Government Revitalization Unit on 18th September 2009. Located in Cabinet Secretariat, the National Policy Unit is expected to carry out planning and coordination of the framework of tax and fiscal policy, the fundamental principles in managing the economy, and the special issues required by the Prime Minister. For the Government Revitalization Unit which is within the Cabinet Office, its missions are to reform national budget, system, and national administration, and reviewing each role of the national and local governments.

Reform of budget process is the overwhelming task of the DPJ-led government currently. From FY 2010, the reform of the budget process will be implemented to improve efficiency of budget through compiling budget from the viewpoint of tax payers under popular sovereignty. This reform is undertaken by the National Policy Unit and the Government Revitalization Unit. First, top-down budget process will be introduced based on the “Basic Principles of Budget formulation” on budget-making process which is to be drafted by the National Policy Unit, taking into account the economic trend and fiscal discipline. Second, transparency and visualization of process of budget formulation and implementation will be required. So, budget requests, also its outlines, and policy evaluation reports must be disclosed on ministries’ websites, especially Ministry of Finance’s. Third, there will be exclusion of wasteful budget implementation. Finally, the “manifestation system of performance budget” will be introduced to set goals on benefits for the people and evaluate the performance about issues of high priority for government. According to the reform of budget process, Ministry of Finance has to resubmit its budget proposal to the Cabinet by the end of the year for consideration and final decision. Then, by the end of January next year, the Cabinet will present this budget to the Diet for final approval, probably at the end of March.   

III.             Government Bond Issue

Government Bond issue is the main source of revenue of the national government which account for 43.1% of the revised FY2009 revenue. There are two types of government bonds, namely construction bond and deficit-financing bond. First, the issuance of construction bond is aimed to raise funds for financing public works such as construction of roads, bridges, and other facilities, as well as for financing equity and investment and loans. Second, Deficit-Financing Bonds are issued to finance current expenditures (non-investment purpose). The issuance of this bond must be enacted on exceptional basis only (year by year). For bond redemption policy, the government must redeem the bonds in 60 years after its issuance of which 1/6 of the bonds will be redeemed in each decade.     

IV.             Cooperation with Multilateral Development Banks (MDBs)

Japan is holding various shares in some MDBs such as ASEAN Development Bank (15.6%), African Development Bank (5.5%), European Bank for Reconstruction and Development (8.5%), Islamic Development Bank (5%), and etc. So, Japan is engaging in development activities all around the world through providing capital to these MBDs. Multilateral Development Banks are institutions that provide financial support and professional advice for economic and social development activities in developing countries. It provides three types of financing: 1). Long-term loans based on market interest for developing countries; 2). Very long-term loans with interest well below market rate, which will be funded through direct contributions for government in donor countries; 3). Grant financing for technical assistance.

In 1996, the Board of Governors of the International Bank for Reconstruction and Development (IBRD) approved a Special Capital Increase of 33,230 shares for Japan. With successful economic development after World War II, Japan has elevated its status from a recipient of loans to a major donor country in MDBs. From 1953 to 1966, Japan had received the total amount of loan of $863 million in order to develop its own infrastructure for industrial expansion. Amazingly, two decades later, final repayment was made in 1990. For example, in 1961, a loan from the World Bank to the Japanese National Railways helped finance one of the most technically advanced railways projects in the world – the new Tokaido Line (Shinkansen Project) between Tokyo and Osaka.  

On international financial cooperation, Japan has taken part in many initiatives in responding to global financial crisis such as in the late 1990s and the recent global economic downturn. The International Finance Cooperation (IFC) Capitalization Fund, in which IFC has invested $1 billion and Japan $2 billion, aims to provide additional capital for banks in developing countries. Another joint initiative is Japan Social Development Fund (JSDF) which was established in June 2000 by the Government of Japan and World Bank in response to the East Asian financial crisis in the late 1990s. JSDF is aimed to provide grants in support of innovative social programs to help alleviate poverty in eligible client countries of the World Bank Group. After its inception, 191 grants have been approved in 2008, with a total value of $243 million. Another interesting issue is the general capital increase at Asian Development Bank in which the leaders of G20, including Japan, have agreed to support a 200% general capital increase at the ADB. In its regional cooperation in the framework of ASEAN+3 (ASEAN, Japan, South Korea, and China), Chiang Mai Initiative Multilateralization (CMIM) , with a total reserve fund of USD 120 billion, was transformed in May 2008 from the original CMI to prevent regional financial crisis, in which Japan hold 30% of total reserve fund. Therefore, Japan plays important and active role in regional and international financial cooperation.    

V.                Conclusion

To sum up, Ministry of Finance are dealing with the most critical economical and financial issues, especially budget-making and government debt management. At the same time, Japan is currently facing other social problems such declining birth rate and aging society, probably resulting in negative impact on economic development in the future. One of the biggest problems is public debt which currently amount 200% of Japan’s Gross Domestic Products (GDP). Furthermore, fiscal rigidity caused by increasing public expenditure such as the rise of allocation tax grant and social security could badly affect government’s financial performance in the future unless government’s review on the public infrastructure projects is successful and efficient. So, Japan’s government should come up with middle or long-term plan to lower the ratio of the public debt to gross domestic product. The appreciation of the yen and deflation also pose big challenge for the Ministry of Finance, which could hurt Japan’s export sector and downsizing economy as a whole. So, Ministry of Finance should set out some specific measure as soon as possible to deal with these issues. Furthermore, stimulus package should not be delayed anymore so as the help invigorate economy as Japan has a very low GDP growth rate in recent years.

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