Politics pushes Japan towards fiscal cliff as money runs out

Thu Aug 23, 2012 10:07pm EDT
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By Stanley White

TOKYO (Reuters) - Japan is slowly edging toward its own version of a "fiscal cliff" as legislation needed to sell bonds for this fiscal year's budget languishes in a split parliament, suggesting the government could run out of money by the end of October.

The fate of the bill is in the hands of the opposition, which controls the upper house and used its clout to make Prime Minister Yoshihiko Noda promise an early election in return for the passage of his sales tax hike plan early this month.

Now, a tacit threat that the budget financing bill put on hold during the tax stand-off could get blocked is keeping Noda under pressure to make good on his pledge to call a vote "soon."

Government sources said without the bill, which would allow it to sell 38.3 trillion yen in bonds or more than 40 percent of this year's budget, the economy and Japan's debt ratings could take a hit.

"Inability to sell the bonds that we need to is not a liquidity problem, it's a sovereign problem," said one government source with direct knowledge of the matter.

"The government is going to have to make some very hard decisions about what spending to cut if there's no agreement on this legislation in the next few weeks."

The term "fiscal cliff" is commonly associated with around $500 billion in expiring U.S. tax cuts and spending cuts that could kick in automatically next year, leading to a "significant recession," according to the Congressional Budget Office.

In Japan, five months into a fiscal year that started in April, the government has made do without the bonds bill by dipping into reserves in special accounts and making technical adjustments to bond auctions, government sources said.   Continued...

A worker stands on a crane which is parked at a construction site at Keihin industrial zone in Kawasaki, south of Tokyo, June 13, 2012. REUTERS/Toru Hanai