Japan is locked in a spiral of ever-increasing debt, and the Japanese government will be unable to break out of that spiral for as long as it continues to rely on unrealistic economic growth forecasts.
The government has released its semiannual "primary balance" fiscal estimate, which shows the balance of payments for items including social security and public works projects in each fiscal year.
Japan is expected to post a 40 trillion yen (roughly $296 billion) deficit for fiscal 2022 due to policies such as economic support measures during the coronavirus crisis. Under the latest primary balance estimate, however, this deficit is projected to shrink rapidly with a drastic increase in tax revenues. It maintains its previous forecast that Japan's finance will return to the black by fiscal 2025.
The reason for the rosy revenue growth outlook is the forecast that Japan will continue to see a rapid 3% growth rate in nominal terms. It assumes that Prime Minister Fumio Kishida's flagship "new capitalism" policy will prove fruitful.
However, Japan hasn't seen this level of economic growth since the bubble economy in the late 1980s to early '90s. In addition to the acceleration of its low birth rate due to the COVID-19 crisis, soaring prices have hit the country hard. The sluggish economy is feared to continue, never mind growth.
A separate estimate has also been released, which sets the growth rate at 0% -- closer to the reality. In this scenario, Japan will see an annual deficit of 6 trillion yen (about $44.5 billion) or more, far from a primary balance surplus.
Prime Minister Kishida, however, has abandoned this 0%-growth forecast, because he has taken on former Prime Minister Shinzo Abe's economic policies focusing on growth. The Abe administration went on a years-long spending spree, resulting in postponing the budget break-even date by five years. If Japan sticks to optimistic estimates, control of expenditures can only keep being disregarded.
Next fiscal year's budget will inevitably be even bigger. Policies including national security, decarbonization and measures to tackle the low birth rate have been marked as "exceptions" in the budgetary request guidelines, which cap budget demands from each ministry and agency. No overall spending limit has been set, either.
In this year's "basic policies for economic and fiscal management and reform," the government did not set a target date for when Japan was to begin posting surpluses. It was unable to resist demands from the aggressive fiscal spending camp within the ruling Liberal Democratic Party.
While spending on areas concerning livelihoods is necessary, it doesn't mean financial discipline can be relaxed. The government must make sure that unnecessary, nonurgent public works projects are eliminated.
Japan's debt, national and local combined, totals some 1.2 quadrillion yen (approximately $8.9 trillion). Unless it achieves a budget surplus each fiscal year, reducing the country's massive debt will remain unreachable.
By fiscal 2025, Japan's baby boomers will have all turned 75, meaning that there will be a surge in social security spending. If Japan keeps running up the bill for future generations, it will not be able to handle its super-aging society. It is the prime minister's responsibility to show a convincing path to sound public finances.