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

Japanese Fiscal Policy and Public Debt Management Mar. 8. 2017 Kenta Ichikawa

Economic Growth Employment and Wage Abenomics Target: (trillion yen) （ ratio ） （ Seasonally adjusted 、 trillion yen ） 600 in 2020 300 1.6 560 Sep. 2008 554 290 1.4 Lehman Shock Real Compensation of Employees 550 280 1.2 Job Opening-to-Application Ratio (RHS) Mar. 2011 540 270 1.0 The Great East Japan 540 539 Nominal GDP Earthquake 260 0.8 530 250 0.6 524 240 0.4 520 2008 2009 2010 2011 2012 2013 2014 2015 2016 （ CY ） 510 Consumption 500 (CY2011=100) 115 490 Private Consumption Integrated Real GDP Consumption Estimates (seasonally adjusted Tax Hike 480 110 series) 470 Consumption Tax Hike (apporoved by the Diet) 105 (CY) 460 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 100 (Source) (actual)Cabinet Office, Government of Japan "Quarterly Estimates of GDP", (forecast)"Fiscal 2017 Economic Outlook (Dec 2016) "(Nominal GDP) 95 2016 2016 2016 2016 （ CY ） 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q 2Q 3Q 4Q 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 3 month average 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 (Source) Cabinet Office, Ministry of Health, Labor and Welfare, Ministry of Internal Affairs and Communications *2016 1Q, 2Q, 3Q, 4Q are annualized base 2

Output gap Potential Growth Rate (Source) Bank of Japan (Source) Bank of Japan 3

Framework of Fiscal Consolidation Basic Idea of Abenomics － Pursuing both economic revitalization and fiscal consolidation by using all policy tools ◇ GDP600 trillion yen [2016 : 540 trillion yen] FY2020 Target ◇ Primary surplus of central and local governments [2015:-3.0% of GDP] 1) Aggressive monetary policy Measures 2) Flexible fiscal policy 3) Growth strategy including structural reform 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. 4

PB Projection Debt to GDP Ratio Projection (%) Primary Surplus Target (ratio to nominal GDP:%) 0 220 ● -8.3 trillion Yen -1 -11.3 200 189.6 trillion 189.5 189.0 -2.1 -1.4 186.0 Yen -2 -2.4 186.7 -2.3 -1.9 180 -3.0 -2.5 180.1 -3 -3.7 ● -3.9 160 -3.4 -4 -3.2 (fiscal target in FY2015) 140 -5 -5.4 -6.3 120 -6 -7 100 (FY) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 (FY) ● :Economic Revitalization Case Average Growth Rate(FY2018-2025): Nominal GDP 3.7%, Real GDP 2.2% In the Economic Revitalization Case, the ratio of Interest Rate: estimate increase up to 4.4% by FY2025 outstanding debt to GDP is projected to decline toward ▲ :Baseline Case FY2025. However, it should be noted that the long term Average Growth Rate(FY2018-2025): Nominal GDP 1.5%, Real GDP 0.9% interest rate is projected to be higher than the nominal Interest Rate: estimate increase up to 1.9% by FY2025 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. ・ 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 5 (Source) Cabinet Office

Average Maturity of JGB ｓ JGB Annual Issuance Amount (trillion yen) 200 16.2 17 U.K. (Year) FILP Bonds 15 177.5 .5 13 Refunding Bonds 176.2 .2 172.0 .0 169.8 .8 11 Newly Issued Bonds 162.2 .2 14.2 164.3 .3 13.1 9 163.9 .9 8.4 14.0 Japan 8 19.6 154.0 .0 10.7 .8 151.5 .5 13.4 151.8 16.5 France 7.1 150 7 12.0 9.4 8.4 6.6 Germany 6 5.8 U.S. 5 4 (FY) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 109.0 111.0 (Source) Estimated by MOF based on data from websites of OECD and government debt management authorities 100 110.2 119.4 90.5 JGB Yields 109.3 114.2 109.1 100.8 2016/7/8 106.1 -0.300% Negative 76.4 4 QQE1 Yield (%) QQE2 Interest Curve 1.0 Rate Control 10Y 0.9 5Y 0.8 2Y 42.4 0.7 50 0.6 0.5 0.4 21.3 3 54.0 0.3 52.4 52.0 43.5 42.3 40.9 0.2 38.6 36.2 36.6 35.9 34.0 9.0 0.1 5.7 0.4 0.0 12.3 5.3 0 -0.1 (FY) 1975 1985 1998 2009 2010 2011 2012 2013 2014 2015 2016 2016 2017 -0.2 (Initial) (Initial) -0.3 (Note1) Up to FY2015: Actual figures (Note2) Figures may not sum up to total because of rounding. -0.4 (3rd Supplementary (Note3) "Newly Issued Bonds" includes Reconstruciton Bonds 2013/01 2013/07 2014/01 2014/07 2015/01 2015/07 2016/01 2016/07 2017/01 budget) and Special Bonds for covering Public Pension Funding. (Source) Bloomberg 6

FY2017 JGB Issuance Plan ➢ 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 （ unit : trillion yen ） life insurance companies, combining normal auctions and “Auctions for Enhanced - (over 10 years) FY2017 Liquidity” － Decrease in 20-year （ - 1.2 trillion yen ） , increase in 40-year （＋ 0.6 trillion yen ） Changes from FY2016 － Increase in Auctions for Enhanced-Liquidity for Super long-term （＋ 1.2 trillion yen ） 15.5-39 Year 3.0 ＋ 0.6 ・ Long-term ： Decreased , reflecting weakened demand in a low interest rate environment （ - 1.2 trillion yen ） 5-15.5 Year 6.6 ＋ 0.6 (10-year JGBs) ・ Short- to Medium-term ： Substantially decreased , based on diminished demand under negative interest 1-5 Year 1.2 ±0 (5, 2-year JGBs and 1-year TBs) rate situation （ - 4.8 trillion yen ） 10.8 + 1.2 Total ➢ The amount of Auctions for Enhanced-Liquidity is to be increased in remaining maturity zones where strong market demands for improved liquidity exist. 〈 Breakdown by Financing Methods 〉 〈 Market Issuance Plan by JGB types 〉 〈 Breakdown by Legal Grounds 〉 （ unit : trillion yen ） （ unit : trillion yen ） （ unit : trillion yen ） FY2017 FY2017 FY2017 Changes from Changes from Changes from FY2016(initial) FY2016(initial) FY2016(initial) 3.0 ＋ 0.6 40-Year Newly-issued JGB market issuance 148.0 - 4.2 bonds 9.6 ±0 30-Year 34.4 - 0.1 (Construction Bonds Market issuance and Special Deficit- 20-Year 12.0 - 1.2 141.2 - 5.8 Financing Bonds) (calendar-based) 10-Year 27.6 - 1.2 Reconstructio 1.5 - 0.6 Non-Price Competitive 6.8 ＋ 1.6 n Bonds 26.4 - 2.4 5-Year Auction Ⅱ etc 26.4 - 1.2 FILP Bonds 12.0 - 4.5 2-Year Sales for Households 3.0 ＋ 1.0 23.8 - 1.2 TBs(1-year) Refunding 106.1 - 3.0 3.0 - 5.0 BOJ rollover 1.6 - 0.4 10-Year Inflation-Indexed Bonds 10.8 ＋ 1.2 Auctions for Enhanced-Liquidity Total 154.0 - 8.2 Total 154.0 - 8.2 ＝ 141.2 - 5.8 Total 7

Appendix

CPI and Consumer Confidence “Do you have anxiety about Consumer Price Index post- retirement life?” (Research by The Central Council for Financial (%, change from the previous year) Services Information) 3.5 3.0 Abenomics 3.3 2.5 2.0 2.1 1.3 1.5 1.7 1.0 0.5 0.7 0.1 0.0 - 0.2 -0.5 Nominal GDP Growth rate Top 3 reasons of “Yes” -1.0 Pension and insurance 72.5% -1.5 -1.8 CPI (less fresh food) -2.0 69.5% Insufficient financial assets CPI (less fresh food & energy) -2.5 Currently uncomfortable about daily lives 41.4% 2011 2012 2013 2014 2015 2016 (CY) *Multiple answers allowed (Source)The Central Council for Financial Services Information (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 9

Wage and Employment (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) (Source) : Ministry of Health, Labor and Welfare, Ministry of Internal Affairs and Communications 10