ECONOMY

Japan lags behind U.S., U.K. in curbing pandemic deficits
Rising interest rates pose risk for Tokyo as it struggles to scale back stimulus


Japan's massive debt burden could grow heavier as interest rates rise.   © Reuters
MARIKO KODAKI, Nikkei staff writer
March 29, 2023 06:27 JST
TOKYO -- Japan's parliament on Tuesday approved a record high budget for the 11th year in a row, falling behind other advanced economies in reducing deficits racked up at the height of the coronavirus pandemic.

The fiscal 2023 budget totals 114 trillion yen ($872 billion) in spending, 6.7 trillion yen more than the initial budget for fiscal 2022, which ends Friday.

The increase largely comes from 5 trillion yen in reserve funds set aside for COVID-19 response, inflation and the war in Ukraine. Before the pandemic, Japan's budgets used to only include around 500 billion yen in reserve funds.


After COVID began to spread worldwide in 2020, advanced economies went deeper into the red to fund their response. But Japan has been slow to wind down fiscal stimulus measures and return spending to normal.

According to research by UBS Group, Japan's primary deficit in 2022 equaled 5.6% of gross domestic product -- little changed from its pandemic peak of 6.3%, and placing it 25th out of 33 economies in terms of improvement.


Japan's Cabinet Office estimates a primary deficit of nearly 50 trillion yen across the national and regional governments for fiscal 2022.

Part of that shortfall comes from committing over 6 trillion yen to COVID employment subsidies for companies that put workers on leave instead of laying them off, a program that will end this month. While the subsidies helped sustain employment, critics say they discouraged the flow of workers to more productive areas of the economy. Meanwhile, expanded subsidies for hospitals that treat coronavirus patients will remain in place in April and beyond.

Other countries have made bigger strides in improving fiscal health. The U.K's deficit shrank to 5.8% of GDP from a peak of 13.4% after the country ended its pandemic job retention scheme in 2021. The U.S., which put together a roughly $2 trillion COVID-19 stimulus package, went to 5.1% from 13.9%.

Japan's challenge partly stems from having much of its COVID response morph into measures meant to ease the pain of inflation. On Tuesday, the government decided to spend around 2 trillion yen from its fiscal 2022 reserves to help large corporations with energy bills. 

In addition to the main budgets, Japan has passed supplementary budgets totaling around 140 trillion yen over the past three years.

"Massive spending has become normal, and we're having trouble putting the lid back on," said Takahide Kiuchi at the Nomura Research Institute.

Amid a global rise in interest rates, "Japan should be thinking about fiscal policy under the assumption that long rates could top 1% in the medium-term as well," said Koya Miyamae at SMBC Nikko Securities.

Japan faces some of the largest fiscal challenges in the world. The ratio of national and local government debt to GDP was 262% in 2021, surpassing Greece and Italy.

The Finance Ministry estimates that if government bond interest rates for all maturities increase 1 percentage point over baseline assumptions, national debt servicing costs for fiscal 2026 will be 33.4 trillion yen, 8 trillion yen higher than in the budget for fiscal 2023.

Meanwhile, the government plans a major increase in defense spending over the five years through fiscal 2027 but has yet to secure all of the funding. Nor have the finances been secured for the proposed doubling of measures to counter the declining birthrate.



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