The Best of the Bureau/The_Best_of_the_Bureau_Bureau_Development_Inc._1992.iso/dp/0036/00364.txt

Text File | 1992-08-07 | 15KB | 280 lines

$Unique_ID{bob00364}
$Pretitle{}
$Title{Japan
Fiscal policy}
$Subtitle{}
$Author{International Society for Educational Information, Inc.}
$Affiliation{Embassy of Japan, Washington DC}
$Subject{fiscal
japanese
government
bonds
japan
japan's
financial
labor
international
banks
see
tables
}
$Date{1989}
$Log{See Table 5.*0036401.tab
See Table 6.*0036402.tab
}
Title:       Japan
Book:        The Japan of Today
Author:      International Society for Educational Information, Inc.
Affiliation: Embassy of Japan, Washington DC
Date:        1989

Fiscal policy

     Japan's fiscal year runs from April 1 through March 31. The various
government ministries and agencies submit their budget requests for the
upcoming fiscal year to the Ministry of Finance by the end of August. The
Ministry of Finance balances these demands against projected revenues and
normally completes a draft budget by the end of December and presents it to
the cabinet. After cabinet approval is secured, the Government submits a
budget bill to the National Diet in January and seeks to secure its passage
before the old fiscal year ends in March.

     The Japanese Fiscal Law of 1947 provides for the issue of government
bonds only in the form of "construction bonds" to raise funds for public works
projects; there is no provision for the issue of bonds to finance current
expenditure. The Government accordingly refrained from issuing
deficit-financing bonds through fiscal 1974. But in 1975 the decline in tax
revenue triggered by the first oil crisis forced the Government to introduce
special legislation providing for the floating of approximately (Y)2 trillion
(about $14 billion at (Y)135 to the dollar) in deficit bonds as part of that
year's supplementary budget.

     Expenditure has continued to grow because of the mounting cost of Japan's
social welfare system, particularly pensions and medical services. As a
result, deficit bonds have been issued every year since 1975.

     The Government increased its public works expenditure during the late
1970s in order to pull the domestic economy out of the post-oil crisis
recession while at the same time contributing to global economic recovery.
Construction bonds provided the funds for this increased activity, and by the
end of fiscal 1978 the total national debt, including deficit bonds, had
passed the (Y)10 trillion ($71.4 billion) mark. By fiscal 1979 new government
bond issues were financing 34.7% of general account expenditures.

     This sort of growth in the volume of government bonds issued interferes
with the traditional roles of fiscal policy - the allocation of resources and
the adjustment of economic activity. It is liable to crowd out private
investment, cause inflation, and place a heavy burden on future generations.
These concerns prompted the Government to undertake a program of fiscal
reconstruction.

     Fiscal reform has been a central theme in domestic policy in the 1980s,
particularly during the administration of Nakasone Yasuhiro, who was prime
minister from November 1982 until October 1987. The Government's target for
fiscal reconstruction is to stop issuing deficit bonds by fiscal 1990. As a
result of its efforts, the ratio of general account spending financed by
government bond issues has gradually fallen, dropping to 19.4% in the initial
budget for fiscal 1987.

[See Table 5.: FY 1987 General Account Budget - Appropriations by Major
Category]

[See Table 6.: Central Government Finances of Major Industrial Countries]

     Japan's present tax system depends heavily on direct taxation,
particularly personal and corporate income taxes. The contribution from
indirect taxation amounts to less than 30%. In addition, an extremely steep
marginal tax rate curve means that high income earners face one of the
heaviest rates of taxation in the world. The radical tax reforms attempted
by the Nakasone Cabinet were designed to achieve a more realistic level of
indirect taxation and to reduce the burden on middle-income earners. These
efforts led to reforms in fiscal 1987 that included tax cuts amounting to
(Y)1.54 trillion and the sharp curtailment of the system of tax exemption for
interest paid on small savings accounts.

     The initial budget for fiscal 1987 is summarized in the accompanying
table. The largest expenditure item is the cost of servicing government bonds.
Outstanding issues as of the end of fiscal 1987 totaled (Y)153 trillion
($1.1 billion), and the cost of servicing this debt, including interest and
redemptions, came to (Y)11.3 trillion ($80.7 billion), or 20.9% of total
expenditure. Despite the drive to cut back on new issues of deficit bonds,
Japan still has a high debt-to-GNP ratio (51.6%) by comparison with the other
major industrial nations.

     It is against this background that the Government has had to cope with
mounting pressure at home and abroad for the expansion of domestic demand as
a means of promoting sustained, inflation-free growth in the world economy and
of correcting the external imbalances in the Japanese economy. During fiscal
1987 the Government responded by introducing the largest supplementary budget
ever, reflecting the provisions of the emergency economic package announced in
May. The aim of this move is to use fiscal policy to stimulate the expansion
of domestic demand, while at the same time continuing the campaign to rebuild
the nation's finances.

Finance

     Japan's central bank is the Bank of Japan, established in 1882. Its
supreme decision-making body is the seven-member Policy Board, chaired by the
governor of the Bank of Japan and including representatives of private-sector
financial institutions, commerce, industry, agriculture and forestry, and the
Government. The greatest responsibility of the Bank of Japan, like central
banks in other countries, is to maintain the value of the nation's currency
through such measures as adjustment of the official discount rate,
manipulation of banks' reserve requirements, and operations in bond and bill
markets. Recently emphasis has been placed on the development of policies in
coordination with the central banks of other nations so as to stabilize
foreign exchange rates and to smooth international financial transactions.

     One feature of the Japanese financial sector is the division of
private-sector banking institutions among different areas of activity. The
categories include long-term credit banks, city and regional banks, which
concentrate on short-term funds, trust banks, and mutual savings and loan
banks and credit associations, which provide financial services for relatively
small businesses.

     These categories evolved in the postwar era, when Japanese corporations
had to rely heavily on borrowed funds because of their low reserves of
accumulated capital. Capital supply channels were diversified according to the
type of funds required in an effort to create a more efficient financial
system. But today the distinctions between these different areas of
specialization are becoming increasingly blurred.

     In the area of international finance, the revised Foreign Exchange Law
of 1980 removed most restrictions regarding international capital
transactions. From around this time, Japanese financial institutions began to
expand and strengthen their capabilities in the field of international
business, and both banks and securities companies accelerated their entry into
overseas financial markets.

     The overseas expansion of Japanese financial institutions and the growth
of their international capital transactions focused increasing attention on
Tokyo as a world financial center. This was accompanied by mounting overseas
demand for the deregulation and internationalization of Japan's money and
capital markets.

     During 1984 the Government responded to this demand by abolishing
regulations on the conversion of foreign funds into yen, establishing a
yen-denominated banker's acceptance market, and deregulating interest rates
for large-denomination time deposits.