The Japanese government will set incremental goals to reduce its heavy reliance on debt in its upcoming fiscal strategy, the Nikkei business daily said, but analysts doubted it would be enough to allay concerns about its massive borrowing.
Credit ratings agencies have threatened to downgrade Japan's sovereign rating as the ambitious spending plans of the country's new government have fueled concerns that Japan's debt burden will continue to grow even as the economy struggles.
Japan's outstanding debts are already almost twice the size of its economy, meaning the government has little leeway to boost spending further without raising taxes, which could push the economy back into recession.
The Democratic Party-led government plans to announce the fiscal discipline target in June and had met on Monday to compile outside experts' views.
The ultimate goal is a steady reduction in the ratio of government debt to gross domestic product, with intermediate steps of halving the primary balance deficit, reducing it to zero, and then achieving a surplus, the Nikkei said on Tuesday, citing a draft of the plan it obtained on Monday.
A budget is in primary balance when spending equals revenues excluding debt servicing costs and income from bond sales.
Dates have yet to be set for any of the reduction targets, according to the Nikkei. The government had unveiled the outlines of a long-term economic growth plan last year but said details would only be announced this June.
But ratings agencies and economists were doubtful whether simply promising to improve the primary balance would be enough to ensure investors that outstanding debt will fall over time.
We would need to see a sustained long-term downtrend in Japan's debt ratios to consider positive action, Andrew Colquhoun, Fitch's Asia sovereign ratings director, said in an interview in the Dealing Room, a Reuters messaging chatroom.
The fiscal plan the Nikkei reported would not be enough to bring about debt downtrend in the short-term, Colquhoun also said.
Fitch has both Japan's foreign currency rating at AA and the local currency rating at AA minus, both with stable outlooks.
Japan's outstanding debt-GDP ratio is the worst among industrialized nations and larger than that of Greece, whose debt crisis has roiled global financial markets for months and thrown the spotlight on heavy government debt levels.
But Japanese officials and economists have stressed that Athen's problem is different and say Japan is unlikely to see a similar backlash from financial markets.
Japan has coped with its massive debt for years thanks to large household savings, but it faces a shrinking and rapidly graying population and a long stagnant economy.
Prime Minister Yukio Hatoyama's approval ratings have tumbled and the government could face pressure to spend more to appeal to voters before an election expected in July.
A Cabinet Office official declined to comment on the Nikkei report, saying the government has not finished debating the details of the fiscal discipline plan.
Data on Tuesday showed that Japan's industrial output slipped for the first time in a year in February due to the Lunar New Year in Asia, although analysts expect solid exports to underpin a fragile economic recovery.
The jobless rate held steady and the availability of jobs improved in the same month, but a fall in household spending showed that the impact of strength in exports and output has been slow in filtering through to the rest of the economy.
Other fiscal discipline proposals include a pay-as-you-go rule -- which would keep spending in line with tax revenues -- and a fixed rate for shrinking budget deficits, the Nikkei said.
Japan's primary budget deficit for fiscal 2009 is estimated at a record 40.6 trillion yen ($438.8 billion) when both central and local government debts are factored in.
We don't know how aggressive this plan would be because, according to the (Nikkei) article, we don't have the timeline to be announced, said Tom Byrne, senior vice president and Asia regional credit officer at Moody's in Singapore.
I imagine it wouldn't be too aggressive because the economy is still in a fragile state. We will be watching for what the actual details are. We will probably comment on Japan's JGB rating after seeing the government's announcement.
Past governments had aimed to achieve a surplus by fiscal 2011, a target abandoned before the Democrats took power in 2009.
The draft budget framework offers a variety of proposals specifying spending levels, one of which would set bounds on how much each ministry and agency could request, the report said.
The parliament approved last week a record 92.3 trillion yen budget for the fiscal year starting on April 1 with a record 44.3 trillion yen of new bond issuance.
Japanese government bonds were little changed by Tuesday afternoon, capped by local stock market gains and weak U.S. Treasuries.
Setting a numerical objective and targeting the primary balance would be a positive development for the bond market, said Koji Ochiai, a senior market economist at Mizuho Investors Securities.
But there is no clear time objective for the primary balance. One could take the view that this is a measure for the upcoming elections, an attempt to skirt around tax hike debates until the elections are over.
(Additional reporting by Bijoy Koyitty in BANGALORE and Shinichi Saoshiro, Rika Otsuka and Charlotte Cooper in TOKYO; Editing by Gopakumar Warrier & Kim Coghill)