Japanese Fiscal Policy and Public Debt Management Mar. 8. 2017 - - PowerPoint PPT Presentation

SLIDE 1

Japanese Fiscal Policy and Public Debt Management

• Mar. 8. 2017

Kenta Ichikawa

SLIDE 2

524 539 540 554

460 470 480 490 500 510 520 530 540 550 560

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(Source) (actual)Cabinet Office, Government of Japan "Quarterly Estimates of GDP", (forecast)"Fiscal 2017 Economic Outlook (Dec 2016) "(Nominal GDP)

(trillion yen)

(CY)

• Sep. 2008

Lehman Shock

• Mar. 2011

The Great East Japan Earthquake

Abenomics Real GDP Nominal GDP

2

*2016 1Q, 2Q, 3Q, 4Q are annualized base Target: 600 in 2020

(Source) Cabinet Office, Ministry of Health, Labor and Welfare, Ministry of Internal Affairs and Communications

Employment and Wage Consumption

3 month average

Economic Growth

2008 2009 2010 2011 2012 2013 2014 2015 2016 2016 1Q 2016 2Q 2016 3Q 2016 4Q Nominal

• 2.1
• 6.0

2.2

• 1.8

0.7 1.7 2.1 3.3 1.3 3.1 1.2 0.7 1.2 Real

• 1.1
• 5.4

4.2

• 0.1

1.5 2.0 0.3 1.2 1.0 2.3 1.8 1.4 1.0

95 100 105 110 115

2008 2009 2010 2011 2012 2013 2014 2015 2016

Private Consumption Integrated Estimates (seasonally adjusted series)

(CY2011=100)

Consumption Tax Hike Consumption Tax Hike (apporoved by the Diet)

（CY） 0.4 0.6 0.8 1.0 1.2 1.4 1.6 240 250 260 270 280 290 300 2008 2009 2010 2011 2012 2013 2014 2015 2016 Real Compensation of Employees Job Opening-to-Application Ratio (RHS)

（Seasonally adjusted、trillion yen）

（CY）

（ratio）

SLIDE 3

3

Potential Growth Rate Output gap

(Source) Bank of Japan (Source) Bank of Japan

SLIDE 4

4

Basic Idea of Abenomics －Pursuing both economic revitalization and fiscal consolidation by using all policy tools ◇GDP600 trillion yen [2016 : 540 trillion yen] ◇Primary surplus of central and local governments [2015:-3.0% of GDP] Measures Benchmarks for Fiscal Reform 2016-18:Total increase of general expenditure from 2015 to 18 [3 years] : 1.6 trillion yen

[cf. Natural annual increase of social security expenditures : 0.64 trillion yen in 2017]

2018: Assess the progress and consider additional expenditure and/or revenue measures as necessary 2019: Consumption tax hike (8% → 10%) Fiscal Shape In the long run －Stabilize Debt to GDP ratio earlier aiming at steady reduction over the medium term. [2016 Central and Local Government Debt:189.5%] －Secure Fiscal sustainability despite population declining and aging society. FY2020 Target 1) Aggressive monetary policy 2) Flexible fiscal policy 3) Growth strategy including structural reform

Framework of Fiscal Consolidation

SLIDE 5

• 6.3
• 5.4
• 3.9
• 3.0
• 2.5
• 2.3 -1.9
• 3.7
• 3.4
• 2.4
• 2.1 -1.4
• 7
• 6
• 5
• 4
• 3
• 2
• 1
• 3.2 (fiscal target in FY2015)

Primary Surplus Target

• 11.3

trillion Yen

• (FY)

(ratio to nominal GDP:%)

• 8.3 trillion

Yen

• :Economic Revitalization Case

Average Growth Rate(FY2018-2025): Nominal GDP 3.7%, Real GDP 2.2% Interest Rate: estimate increase up to 4.4% by FY2025

▲:Baseline Case

Average Growth Rate(FY2018-2025): Nominal GDP 1.5%, Real GDP 0.9% Interest Rate: estimate increase up to 1.9% by FY2025

186.7 180.1 186.0 189.5 189.0 189.6

100 120 140 160 180 200 220 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

(%)

(FY)

5

Debt to GDP Ratio Projection

In the Economic Revitalization Case, the ratio of

• utstanding debt to GDP is projected to decline toward
• FY2025. However, it should be noted that the long term

interest rate is projected to be higher than the nominal GDP growth rate after FY2023, then the existing bonds which had been issued at low interest rates would be refinanced sequentially at higher interest rates.

PB Projection

(Source) Cabinet Office

• ⇒●

・Continuing tight expenditure control (Total increase of general expenditure from 2015 to 2018: +1.6 trillion yen) ・Additional expenditure and revenue measures following the 2018 interim review

SLIDE 6

5.3 12.3 34.0 52.0 42.3 54.0 52.4 43.5 38.6 36.2 36.6 40.9 35.9 0.4 9.0 42.4 90.5 100.8 109.0 111.0 110.2 119.4 114.2 109.1 109.3 106.1 9.4 8.4 13.1 14.2 10.7 14.0 13.4 16.5 19.6 12.0

5.7 21.3 3 76.4 4 151.8 .8 151.5 .5 176.2 .2 177.5 .5 164.3 .3 172.0 .0 163.9 .9 162.2 .2 169.8 .8 154.0 .0 50 100 150 200 1975 1985 1998 2009 2010 2011 2012 2013 2014 2015 2016 2016 2017 (trillion yen)

FILP Bonds Refunding Bonds Newly Issued Bonds

(FY)

(Note1) Up to FY2015: Actual figures (Note2) Figures may not sum up to total because of rounding. (Note3) "Newly Issued Bonds" includes Reconstruciton Bonds and Special Bonds for covering Public Pension Funding.

(Initial) (3rd Supplementary budget) (Initial)

• 0.4
• 0.3
• 0.2
• 0.1

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

2013/01 2013/07 2014/01 2014/07 2015/01 2015/07 2016/01 2016/07 2017/01

10Y 5Y 2Y 2016/7/8

• 0.300%

(%)

Negative Interest Rate QQE2 QQE1 Yield Curve Control 4 5 6 7 8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(Year) (FY)

Japan France Germany U.S. 9 11 13 15 17 U.K.

6

JGB Annual Issuance Amount Average Maturity of JGBｓ JGB Yields

(Source) Bloomberg

16.2 8.4 7.1 6.6 5.8

(Source) Estimated by MOF based on data from websites of OECD and government debt management authorities

SLIDE 7

（unit : trillion yen）

FY2017

Changes from FY2016(initial)

40-Year

3.0 ＋0.6

30-Year

9.6 ±0

20-Year

12.0

• 1.2

10-Year

27.6

• 1.2

5-Year

26.4

• 2.4

2-Year

26.4

• 1.2

TBs(1-year)

23.8

• 1.2

10-Year Inflation-Indexed

1.6

• 0.4

Auctions for Enhanced-Liquidity

10.8 ＋1.2

Total

141.2

• 5.8

（unit : trillion yen）

FY2017

Changes from FY2016(initial)

Newly-issued bonds

(Construction Bonds and Special Deficit- Financing Bonds)

34.4

• 0.1

Reconstructio n Bonds

1.5

• 0.6

FILP Bonds

12.0

• 4.5

Refunding Bonds

106.1

• 3.0

Total

154.0

• 8.2

（unit : trillion yen）

FY2017

Changes from FY2016(initial)

JGB market issuance

148.0

• 4.2

Market issuance (calendar-based)

141.2

• 5.8

Non-Price Competitive Auction Ⅱ etc

6.8 ＋1.6

Sales for Households

3.0 ＋1.0

BOJ rollover

3.0

• 5.0

Total

154.0

• 8.2

〈Breakdown by Financing Methods〉 〈Breakdown by Legal Grounds〉 〈Market Issuance Plan by JGB types〉

＝

7

➢

Maturity structure is designed to reflect investor demands appropriately, so that the current low interest rate situation should be utilized smoothly and effectively. ・ Super long-term ：Effectively increased carefully assessing potential demand from investors such as

(over 10 years)

life insurance companies, combining normal auctions and “Auctions for Enhanced- Liquidity”

－ Decrease in 20-year（- 1.2 trillion yen）, increase in 40-year（＋0.6 trillion yen） － Increase in Auctions for Enhanced-Liquidity for Super long-term（＋1.2 trillion yen）

・ Long-term ：Decreased, reflecting weakened demand in a low interest rate environment

(10-year JGBs)

（- 1.2 trillion yen） ・ Short- to Medium-term ：Substantially decreased, based on diminished demand under negative interest

(5, 2-year JGBs and 1-year TBs) rate situation（- 4.8 trillion yen）

➢

The amount of Auctions for Enhanced-Liquidity is to be increased in remaining maturity zones where strong market demands for improved liquidity exist.

（unit : trillion yen）

FY2017

Changes from FY2016

15.5-39 Year 3.0 ＋0.6 5-15.5 Year 6.6 ＋0.6 1-5 Year 1.2 ±0 Total 10.8 + 1.2

FY2017 JGB Issuance Plan

SLIDE 8

Appendix

SLIDE 9

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

2011 2012 2013 2014 2015 2016

Nominal GDP Growth rate CPI (less fresh food) CPI (less fresh food & energy)

(%, change from the previous year)

(CY)

(Note) The effects of consumer tax rate change in April 2014 on CPI are eliminated. (Source) MOF, Cabinet Office, Ministry of Internal Affairs and Communications, BOJ

CPI and Consumer Confidence 9

Consumer Price Index

“Do you have anxiety about post-retirement life?”

(Research by The Central Council for Financial Services Information)

(Source)The Central Council for Financial Services Information

Top 3 reasons of “Yes” Pension and insurance

72.5%

Insufficient financial assets

69.5%

Currently uncomfortable about daily lives

41.4%

*Multiple answers allowed

Abenomics

0.1

• 0.2

3.3 2.1 1.7

• 1.8

0.7 1.3

SLIDE 10

Wage and Employment

(Source) : Ministry of Health, Labor and Welfare, Ministry of Internal Affairs and Communications

10

(million, %)

2012 2013 2014 2015 2016 Regular Employees Change of Nominal Wages

• 0.3

0.4 0.9 0.4 0.8 Number of Employees 33.4 32.9 32.8 33.0 33.6 (change) (-0.4) (-1.4) (-0.5) (0.8) (1.5) Non-regular Employees Change of Nominal Wages 1.5

• 0.4

0.5 0.5

• 0.1

Number of Employees 18.1 19.1 19.6 19.8 20.2 (change) (0.1) (5.1) (2.9) (0.9) (1.8) Total Employees Change of Nominal Wages

• 0.9
• 0.4

0.4 0.1 0.5 Change of Real Wages

• 0.9
• 0.9
• 2.8
• 0.9

0.7 Number of Employees 51.5 52.0 52.4 52.8 53.7 (change) (-0.2) (0.9) (0.7) (0.8) (1.7)

SLIDE 11

Growth Strategy

• Reduction of Effective

Corporate Tax Rate

―37.00%(2012) → 29.74%(2018)

• Corporate Governance

(more than 3500 companies) ―Stewardship Code (214 corporate investors)

• Electric Power Deregulation
• TPP, Japan-EU EPA
• Agriculture Structural Reform
• Drastic simplification project for

regulation and administrative process for foreign investors

Regulation Reform

• Equal pay for equal work

－guideline released on Dec

• Increase minimum wage

―3% hike（2016）

• Increase the capacity of

child care and elderly care

―500k for each ―raise wages for care workers

• Reducing working hours and

improving labor productivity

• Lengthen the eligible period

for maternity leave benefits

• Utilizing foreign professional

―World’s fastest Green card system

• Income Tax reform

―To encourage female labor participation(From FY2017)

Work-style and Labor Market Reform

• Forth Industrial Revolution

（Society5.0）

－Social application of AI, Robot, IOT

• Industrial Structural Reform
• Medical Care Innovation
• Encouraging Investment for

R&D

－prioritize public investment in growth- enhancing areas －support new cutting-edge technologies

Investment for the Future

Japanese stewardship code will be revised in 2017.

(PM Abe’s speech in NY (Sep. 2016 ))

The Council for Regulatory Reform started from Sep 2016. －Cabinet Decision Jun. 2016 Submit related Bill in2017

• Introduce a new

government-sponsored scholarship

• Shorten the minimum

eligible period for receiving pension from 25 to 10 years

Increase Disposable Income

(for low income households)

11

SLIDE 12

• Spurring innovation and investment
• Reward higher R&D investment by providing more tax

deduction (up to 14% of total R&D expenses).

• Extend the deadline for corporate tax filing by three months

to help companies better prepare for dialogue with investors; and expand deductible management remuneration to include a salary that is linked to share price.

• Create a new 20-year tax-exempt Nippon Individual

Savings Account (NISA) scheme to offer more safe investment opportunities.

• Boosting wages and encouraging women to work more
• Expand the tax incentive for an increase in salary expense

(from 10 to 12% of the increase).

• Raise the income limit for the spousal tax deduction from

1.03 million to 1.5 million.

• Others
• Provide tax exemption when foreign visitors purchase sake

at local breweries.

• Review applicability of inheritance tax for foreign residents

to attract highly-skilled foreign workers.

Deductible amount Annual income

1,500

(Unit: thousand yen)

2,010 1,030

Spousal Tax Deduction

380

R&D Tax Deduction

1,410

12 FY 2017 Tax Reforms Promoting Corporate Investment and Wage Hikes

SLIDE 13

6.2 8.4 10.4 13.4 19.7 24.0 40.0 60.0 0.8 1.1 1.4 2.0 3.5 3.7 8.0 15.0 4 8 12 16 10 20 30 40 50 60 70 2011 2012 2013 2014 2015 2016 … 2020 … 2030

Visitor arrivals(←left) The value of travel consumption of inbound tourists(right→)

（trillion yen） （million）

Progress of Structural Reforms and Growth Strategy 13

Source : Tokyo Stock Exchange

12.9% 15.0% 16.7% 18.0% 21.5% 48.4% 79.7% 0% 20% 40% 60% 80% 2010 2011 2012 2013 2014 2015 2016 +31.3%

Corporate Governance Reform

Ratio of 1st Section Companies with two or more Independent Directors

66.5 67.3 67.4 67.7 68.1 68.8 69.3 70.1 70.3 71.1 71.6 71.6 72.3 73.6 74.5 75.2 76.7 76.4 75.9 75.6 75.3 75.3 75.5 75.4 75.8 75.6 75.2 74.7 74.5 73.9 73.9 73.7 85.6 85.7 85.6 85.4 85.3 86.5 86.2 87.1 87.5 87.1 86.6 87.3 87.6 88.1 88.0 88.3

65 70 75 80 85 90 Japan US Sweden

(%)

Women’s labor force participation rate

(cross country comparison )

*Age: 25-54 Source: OECD Stat 40 million 8 tril. yen

（2020）

60 million 15 tril. yen

（2030）

Foreign visitors ・・・ Consumption ・・・

Our target

Source: Japan National Tourism Organization 1.0 1.5 2.0 2.5 3.0 3.5 4.0

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Japan U.S. France Germany U.K.

（％）

Total fertility rate in Japan

1985 1995 2005 2015 1.76 1.42 1.26 1.46

Source: Cabinet Office

Total fertility rate Toward a “Tourism-oriented developed nation”

SLIDE 14

2008 128.08 2040 107.28 2011 111.11 2040 96.43 1997 86.99 2040 57.87 20 40 60 80 100 120 140 80 85 90 95 00 05 10 15 20 25 30 35 40 1998 67.93 2012 65.55 66.48 1997 65.57 2012 62.70 64.40 2002 3.59 2.08 5 10 15 20 50 55 60 65 70 80 85 90 95 00 05 10 15 (Source) Ministry of Internal Affairs and Communications, National Institute of Population and Social Security Research

＜Population＞ ＜Labor force＞

Unemployed persons（RHS） Workers（LHS） Labor force(LHS)

（million people) （million people）

Total

Projection

15-64years old

（million people） 1980 1980 2000 2000

Over 15 years old

14

SLIDE 15

(General account, based on initial budgets)

15

Expenditure and Revenue

(Note) Figures may not add up to the totals due to rounding. (Unit : trillion yen)

FY2017 Initial Budget

34.4 57.7 97.5 20 40 60 80 100 1975 80 85 90 95 2000 05 10 15 (trillion yen) (FY)

Total Expenditure Tax Revenue Bond issue volume

SLIDE 16

(Source) OECD “Economic Outlook 100"(November 2016). (Note1) Figures represent the general government-based data (including the central/local governments and social security funds), except for Japan and the U.S. where the figures of the social security funds are

• excluded. The following figures include social security funds.

(Note2) FY2017 draft budget data is not reflected. (Note3) Figures for Japan are adjusted to exclude special factors.

16

General Government Gross Debt

(Source) IMF “World Economic Outlook Database"(October 2016). (Note) FY2017 draft budget data is not reflected.

General Government Fiscal balance

（CY）

• 16.0
• 12.0
• 8.0
• 4.0

0.0 4.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

（％）

Japan U.S. U.K. France Italy Canada Germany

（CY） 30 60 90 120 150 180 210 240 270

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

（％）

Japan Italy France U.K. U.S. Canada Germany

SLIDE 17

15.1 21.3 24.4 26.3 25.4 39.1 25.0 37.5 36.2 27.0 31.6 35.5 26.2 31.6 46.7 39.4 31.4 37.3 31.1 46.9 30.3 29.7 37.1 50.2 33.7 37.4 40.6 40.5 45.2 44.5 43.1 40.9 69.2 65.9 2.4 2.2 8.3 8.8 11.4 17.2 6.6 8.2 18.0 13.4 10.4 20.1 16.3 1.4 9.4 17.5 12.9 21.1 5.4 22.1 23.3 17.3 5.7 22.4 19.9 20.6 22.0 18.6 19.3 23.4 27.3 1.5 29.4

17.5 23.4 32.7 35.1 36.8 39.1 42.2 44.1 44.4 44.9 45.0 45.9 46.3 47.9 48.1 48.9 48.9 50.1 52.3 52.3 52.5 52.9 54.4 56.0 56.2 57.3 61.2 62.6 63.8 63.8 66.5 68.2 70.7 95.3 50 100 34 Mexico 33 Chile 32 United States 31 Switzerland 30 Korea 29 Australia 28 Japan 27 Canada 26 Israel 25 Poland 24 Latvia 23 United Kingdom 22 Slovak Republic 21 Estonia 20 New Zealand 19 Ireland 18 Spain 17 Norway 16 Netherlands 15 Iceland 14 Germany 13 Czech Republic 12 Portugal 11 Sweden 10 Slovenia 9 Greece 8 Hungary 7 Austria 6 Finland 5 Italy 4 Belgium 3 France 2 Denmark 1 Luxembourg

Comparison of OECD Countries 17

General Government Social Security Expenditures (as a percentage of GDP: 2011) Tax and Social Security Contributions Ratio (as a percentage of NI: 2014)

(Source) OECD “National Accounts”, “Revenue Statistics”, EU “Government Finance Statistics”, etc. (Note1) The data in 2011 is used because no comparable data is available in terms of statistical standards after 2012. (Note2) Figures represent the general government-based data (including the central/local governments and the social security funds) except for fiscal balance. (Source) Cabinet Office, OECD “National Accounts”, “Revenue Statistics”, (Note) Figures of Iceland are as of CY2013.

32.8 31.3 30.3 28.0 26.8 26.8 26.7 26.6 25.6 25.4 25.2 24.4 24.0 24.0 23.9 23.1 23.1 22.6 22.1 20.4 20.1 18.5 17.6 17.4 17.2 16.4 15.8 14.5 7.9

20 40

1 Denmark 2 France 3 Finland 4 Austria 5 Greece 6 Italy 7 Belgium 8 Sweden 9 Germany 10 Slovenia 11 Japan 12 Norway 13 United Kingdom 14 Portugal 15 Netherlands 16 Luxembourg 17 Spain 18 Ireland 19 Hungary 20 Czech Republic 21 Poland 22 Iceland 23 Slovak Republic 24 Estonia 25 United States 26 Turkey 27 Israel 28 Switzerland 29 Korea

SLIDE 18

18 Breakdown by JGB and T-Bill Holders (Sep. 2016)

Note.1: "JGB" includes FILP Bonds. "T-Bill" is the sum of "Treasury Bills (TBs)" and "Financial Bills (FBs)" with a maturity of 1 year or less and TBs and FBs have been jointly issued since February 2009. Note.2: "Banks, etc." includes Japan Post Bank, "Securities investment trust " and "Securities Companies". Note.3: "Insurance and Pension etc." includes Japan Post Insurance, Public Pensions, Pension Funds, etc. Source: Bank of Japan “Flow of Funds Accounts (Preliminary Figures)”

Insurance and Pension etc.

28.0% Banks etc. 22.4% BOJ 37.9%

Household

1.2%

Foreigners

10.3%

General Government

(ex Public Pensions)

0.2%

Total \1,091 trillion (≒$9.3 trillion) JGB and T-Bill Holders

Total \971trillion (≒$8.3 trillion) JGB Holders

BOJ 36.7% Banks etc. 24.7%

Insurance and Pension etc.

31.3%

Household

1.4%

Foreigners

5.7%

General Government

(ex Public Pensions)

0.2%

T-Bill Holders Total \120 trillion (≒$1.0 trillion)

Foreigners

47.4%

Insurance and Pension etc.

1.9% BOJ 47.3% Banks etc. 3.4%

SLIDE 19

• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 1.2 1.4 2016/6/23 Brexit

（％） （％）

2016/7/29 Announcement of conducting "Comprehensive Assessment"at the next MPM

2016/1/29 QQEN 2016/11/8 U.S. presidential election 2016/9/21 QQE with YCC

40year 30year 20year 10year 5year 2year

JGB yields 19

(Source) Japan Bond Trading Co.

SLIDE 20

• 90
• 80
• 70
• 60
• 50
• 40
• 30
• 20
• 10

15/1 15/7 16/1 16/7 17/1

（bp）

1 year 2 year

"（↑）"shows that the outlook is positive. "（↓）"shows that the outlook is negative.

(Long-term debt denominated in home currency on 24 Feb 2017)

List of Major Countries‘ Sovereign Ratings Dollar/Yen Basis Spread

(Source) Bloomberg

20

Moody’s S&P Fitch Aaa/AAA U.S. U.S. Germany Germany U.S. U.S. Germany Germany Canada Canada Germany Germany Canada Canada Canada Canada Aa1/AA+ U.K.(↓) U.S. U.S. Aa2/AA France France U.K.(↓) U.K.(↓) Korea Korea France France France France Korea Korea Aa3/AA- China(↓) China(↓) Korea Korea A1/A+ Japan Japan Japan Japan China China Ireland Ireland A2/A Japan(↓) Ireland Ireland A3/A- Ireland(↑) Baa1/BBB+ Spain Spain Spain Spain Italy(↓) Baa2/BBB Italy(↓) Spain Spain Baa3/BBB- Italy Italy Ba1/BB+ Portugal Portugal Portugal Portugal Portugal Portugal Ba2/BB Ba3/BB- B1/B+ B2/B B3/B- Greece Greece Caa1/CCC+ Caa2/CCC Greece Greece Caa3/CCC- Greece Greece Ca/CC C SD/RD