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Japan: Government forced to delay public spending amid political impasse

October 2, 2012

On 7 September, the government announced that it would delay JPY 5.0 trillion (USD 63 billion) of public spending until November. The decision mostly affects fund transfers to municipalities and aids to universities, as spending on health care, social welfare, police and other essential public services was left untouched. This marks the first time in Japanese post-war history that the government has been forced to delay scheduled spending in the middle of a fiscal year. The announcement prompted the Bank of Japan (BoJ) to inject around JPY 2.0 trillion (approximately USD 25 billion) into the market, in a precautionary move aimed at preventing a spike in cash demand from municipalities. The delay was caused by the Liberal Democratic Party's (LDP) opposition in the upper house of the parliament, where the ruling Democratic Party of Japan (DPJ) lacks a majority. The LDP and other opposition parties impeded the approval of a long-awaited debt-issuance bill needed to finance about 40% of the current fiscal year's budget. With its opposition, the LDP intends to force the government into fulfilling its pledge to call elections "soon", an agreement that was reached with the LDP - the main opposition party and frontrunner in latest polls - in exchange for its support for passing a bill doubling the country's sales tax to 10% by 2015. Meanwhile, both the DPJ and the LDP recently held internal elections, which resulted in Prime Minister Yoshihiko Noda maintaining its leadership over the DPJ and former Prime Minister Shinzo Abe becoming leader of the LDP. Abe, who is likely to become Japan's next prime minister, advocates for stronger BoJ action in combating deflation, including raising its inflation target to 2%-3% from the current 1%. Abe also has a hard line on China regarding the recent dispute on the Senkaku/Diaoyu islands.


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