/www.bloomberg.com/ By Mayumi Otsuma
Tokyo, Dec. 19 (Bloomberg) -- Japan's government may sell a record amount of bonds next fiscal year as Prime Minister Junichiro Koizumi cuts taxes and boosts spending to stave off a fourth recession in a decade.
Analysts estimated that Japan would probably sell 36.7 trillion yen ($304 billion) of new bonds in the year starting April 1, about a quarter more than initial Ministry of Finance estimates for this year, according to a survey by Bloomberg News. A slowing economy may force the government to adopt another budget during the fiscal year, which would probably push the total above the record 37.5 trillion yen in the year to March 2000.
``The government will be forced to come up with another extra spending package, and new bond sales will probably rise,'' said Susumu Kato, a fixed-income strategist at Lehman Brothers Japan Inc. He forecast 36.4 trillion yen of new bond sales.
Since 1992, Japan has earmarked more than 100 trillion yen of extra spending on dams, bridges and other projects, increasing government debt to about 40 percent more than the size of the economy. Even so, economic growth averaged 1 percent a year in the past decade, and unemployment has risen to a record 5.5 percent.
The amount of new bond sales for next fiscal year, in addition to the amount sold to pay existing debt, will be announced tomorrow morning along with the budget.
Broken Promises
IDEAglobal and JP Morgan Securities Asia Ltd. last month forecast total new bond sales may rise to about 40 trillion yen next fiscal year, an amount that may push up bond yields. Since then reports in the Nihon Keizai and other newspapers have had lower numbers, suggesting the government will try to limit new bond sales at the start of the year while increasing them later.
It wouldn't be the first time the government has pledged budgetary discipline and then reneged. This fiscal year, Koizumi promised to limit new bond sales to 30 trillion yen. He was forced to drop the promise last month as the government approved extra spending to create jobs and help small companies.
``It's just contradictory, makes no sense and is totally unclear what Koizumi wants to pursue,'' said Mamoru Yamazaki, chief economist at Barclays Capital Japan Ltd. ``He's expanding spending this year because he's worried about the economy and then immediately tightens spending next year.''
The No. 244 bond, which carries a 1 percent coupon and matures in 2012, was unchanged at 2:42 p.m. in Tokyo, leaving its yield at 0.945 percent. The yield earlier fell to 0.935 percent, matching a four-year low.
Recovery `Weakens'
Japan's recovery is ``weakening and the state of the economy remains roughly flat,'' the Cabinet Office said yesterday in its monthly economic report, which lowered its evaluation of the economy for a second month.
Growth in the world's second-largest economy slowed to an annual pace of 0.8 percent in the third quarter from 0.9 percent in the second. Exports, which accounted for half of the second quarter's expansion, slowed to growth of 0.6 percent in the third quarter from 5.9 percent.
Although a larger supply of bonds may reduce prices, bonds may also benefit from expectations that the Bank of Japan will succumb to government pressure to step up purchases of government securities from lenders to pump more money into the economy, investors said.
The Bank of Japan has increased its monthly bond purchases four times, by 200 billion yen each time, since August 2001 and now accounts for 14.4 trillion yen of purchases per year. The central bank this week left the amount of bonds it buys from banks each month unchanged at 1.2 trillion yen.
Public Works
Koizumi wants to halt the expansion of public debt, already the heaviest in the industrialized world, by avoiding any spending increase in next fiscal year's budget. That may not be easy as the economy slows and unemployment rises, increasing pressure for more spending.
General spending -- excluding debt payment costs and tax subsidies to local governments -- will rise 0.1 percent to 47.6 trillion yen, the Nihon Keizai newspaper reported yesterday, without citing anyone.
Public works spending -- the main tool to create jobs and stimulate businesses, particularly in rural areas -- will be reduced by 3.7 percent, the paper said. Total spending will increase 0.7 percent to 81.8 trillion yen, it said.
``The 3.7 percent cut in public works spending is troublesome,'' said Seiji Adachi, an economist at Credit Suisse First Boston Japan Ltd., because it would reduce economic growth.
Slumping growth will cut tax revenue, a major source of government income. Tax revenue will probably amount to 42 trillion yen, Finance Minister Masajuro Shiokawa said Tuesday. That's 5 percent less from this year and a 17-year low.
Tax Revenue
``Next year, we must expect the tax revenue situation will be very severe,'' Shiokawa said. The government plans to reduce taxes by 1.8 trillion yen next year, and tax receipts from corporations will deteriorate, he said.