TOKYO (AP) — Japan's Cabinet approved Thursday a blueprint for cuts to welfare and public works spending intended to repair the nation's overstretched finances.
Prime Minister Shinzo Abe has meanwhile deferred until later this year a decision on hiking Japan's sales tax, which might help fortify public finances, but could do more harm than good if it derails the economic recovery nurtured by Abe's government.
Japan's public debt amounts to more than twice the size of its economy, which is the world's third largest. Earlier this week, the International Monetary Fund reiterated its call for a "credible" fiscal plan to help bring it under control. Abe is expected to respond to that call at a summit of the Group of 20 major developed and emerging economies early next month.
The plan approved Thursday would slash social security spending and reduce public works costs by 10 percent. So far, Abe has focused on boosting spending to stimulate growth and fight deflation. Economists say the still-fragile recovery can be sustained only if the government tackles difficult reforms needed to improve Japan's competitiveness and counter the impact of a fast-aging and shrinking population.
Abe's ruling party controls both houses of parliament but it's unclear whether the plan can win the approval of lawmakers without being significantly watered down. Cuts to benefits such as old age pensions are politically unpalatable for a fast-greying electorate.
Japan's Finance Ministry and its central bank, which wrapped up a monthly policy meeting Thursday with no change in its extreme monetary easing policies, have pushed for stronger fiscal discipline, warning investors will lose confidence in the country's financial health if the debt continues to grow.
Bank of Japan Gov. Haruhiko Kuroda said the central bank left unchanged its economic assessment that a moderate recovery is happening, but did see some signs of improvement from the month before.
Kuroda reiterated his support for going ahead with the sales tax hike, saying he expects the economic outlook to continue to strengthen. Original plans called for a 3 percentage point increase in the current tax to 8 percent next April, to be followed by another 2 point increase in 2015.
The fiscal blueprint, which is part of the budget process for fiscal 2014, would reduce the government's deficit by 17 trillion yen ($176 billion), or half, over the next two years, to help curb the issuance of fresh government debt. A key element of that reduction would come through lower spending on social security, such as old-age pensions and welfare.
It comes as the government mulls spending hundreds of millions of dollars to contain radiation-contaminated water at a nuclear plant wrecked by the March 2011 tsunami.
Plans call for spending 30 billion to 40 billion yen ($300 million to $400 million) on efforts to solidify ground surrounding reactor buildings at the plant in Fukushima to prevent underground water from entering contaminated buildings. That would be in addition to an 8.7 billion yen ($90 milllion) budget this year for decommissioning projects including development of robots to locate and remove debris from melted reactors.
The nuclear disaster is one of several massive drains on national finances. Neglect of the country's infrastructure has left many tunnels, dams and bridges in need of urgent repairs. Surging pension and health care costs for the growing elder population are among other pressing concerns.
So far, flooding the economy with cash appears to have helped support a recovery, with growth at 4.1 percent in the January-March quarter. Data for April-June, due for release Monday, are expected to show growth at about 3.5 percent.
But a Cabinet survey released Thursday showed that confidence among people with jobs sensitive to economic conditions, such as restaurant workers and taxi drivers, worsened for the fourth straight month in July. The government said extreme heat was partly to blame, as people stayed home rather than venturing out to eat and shop.
With the government already reining in spending to address fiscal concerns, and the sales tax hike due to dent consumer demand if it takes effect in April, future growth will depend on higher corporate investment and wages, Moody's Investor's Service said in a report. Otherwise, the government risks increasing debt without spurring enough growth to pay for it.
But a key adviser to Abe, economist Koichi Hamada, said Thursday that he was concerned the tax hike would cause too much of a setback.
"It would be a pretty big shock," he told reporters.