MARKET MOVER - BNP PARIBAS - Investment Services India

Potential cash shortages ahead
But if the debt-financing legislation remains blocked by
the time December comes, drastic spending cuts and
a partial shutdown of government will be unavoidable.
The impact on the economy would be severe.
Budgetary outlays are prevalent in December. For
example, in December 2011, expenditures exceeded
revenue (excluding government bonds) by almost JPY
7trn (equivalent to roughly 5.7% of Q4 GDP). In the
final quarter of FY2011, revenue exceeded spending
by roughly JPY 2trn in January, but this was followed
by shortfalls of more than JPY 5trn in February and
roughly JPY 10trn in March, for a combined quarterly
shortage of JPY 13trn (equivalent to about 11.1% of
Q1 GDP). As the budget balance this fiscal year will
likely be similar, very drastic spending cuts could
become necessary. Of course, all spending does not
directly affect the economy (delaying transfers to
special accounts absorbs the reserve surpluses
parked in some special accounts). But even if the
amount were reduced by half, the impact on the
economy would be substantial. Currently, with exports
trending lower as a result of the slowing global
economy and with economic support ending from the
eco-car subsidy programme and income transfers to
households in quake-hit areas, we expect the
economy to enter another soft patch from Q3. But if
the deficit-financing bill is not enacted by December,
cuts in government spending will make conditions far
worse than just a soft patch.
Election by year end seems likely
To avoid this, the debt-financing legislation needs to
be enacted as soon as possible. But that is easier
said than done. To win cooperation from the
opposition LDP and New Komeito, Prime Minister
Noda will have to make some kind of deal, and we
see two main possibilities here. The most
straightforward deal under current circumstances and
based on past experience would be to agree to
dissolve the lower house in exchange for opposition
support of the debt-financing legislation and another
vital bill involving electoral reform to rectify vote-value
disparities. As both the DPJ and LDP are slated to
hold leadership elections shortly (the DPJ on 21
September, the LDP on 26 September), followed by
an extraordinary Diet session in early October, such
a deal would likely mean passing the debt-financing
bill and electoral reform in October, then dissolving
the lower house in November for an election by year
end. While this election scenario is probable, there is
a possibility that Prime Minister Noda (who looks set
to be re-elected DPJ head) could put off calling an
election until the last minute, as he is also eager to
enact a supplementary budget. In this case, the
election would be pushed back to January or so.
Another condition for the LDP’s cooperation
The second potential deal involves the LDP making
its cooperation on the debt-financing legislation
contingent on an agreement to forswear using such
legislation as a political trump card, in other words,
Chart 1: Impact of Planned Spending Delays
General account expenditures (excludes outlays relating to construction bonds)
Path if budget is fully implemented
JPY
46.1 trillion
Total revenue if debt-financing bill not enacted (authorized spending total)
JPY 10
trillion +
JPY
38.6 trillion
Spending implemented as of
30 September
(MOF projection was JPY
39.3 trillion on 6 July)
Funding requested by
various agencies:
JPY 10.9 trillion
Path if spending is curbed from
September
Impact (i.e., savings) from spending curbs
*September: (Tax rev enue grants: -JPY 2.2 trillion; subsidies to Japan Health Insurance Assoc.:
-JPY 500 billion; subsidies to independent organizations: -JPY 100 billion)
*October: (Tax rev enue grants: +JPY 700 billion; transf ers to public pension special account:
-JPY 1.1 trillion; subsidies to independent organizations: -JPY 100 billion)
*November : (Tax rev enue grants: -JPY 800 billion; gov ernment subsidization of priv ate education:
-JPY 1.1 trillion; subsidies to independent organizations: -JPY 100 billion)
April May June
July August September October November
Source: MOF, BNP Paribas
Note 1: Projections as of now, figures could change.
Note 2: “Path if budget is fully implemented” incorporates normal management of the budget (including adjusting the timing of transfers to special accounts).
Note 3: “Path if spending is curbed from September” assumes tax revenue grants in November will be handled the same as those in September (the MoF has
indicated it will review this). (Meanwhile, the projected savings of JPY 2.2trn from curbing tax-revenue grants in September includes the normal grants to prefectural
governments worth JPY 1.4trn plus JPY 700bn from forgoing the front-loading of transfers to the special account for local-allocation tax.)
Ryutaro Kono/ Makoto Watanabe 20 September 2012
Market Mover
16
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