TOKYO (Reuters) - A top advisory panel to Finance Minister Taro Aso urged the government on Monday to keep its grip on fiscal reform, warning against any complacency about low borrowing costs thanks to years of the Bank of Japan's monetary stimulus.
Fiscal reform is an urgent task for Japan's heavily indebted government, saddled with the industrial world's largest public debt that tops twice the size of its $5 trillion (£3.90 trillion pounds) economy.
But a prolonged low-rate environment due to the central bank's massive monetary easing could lead to a view that fiscal reform can take a backseat as long as nominal interest rates undershoot nominal growth, helping lower the debt-to-GDP ratio, the panel said in its recommendation.
The government must stick to its aim of balancing a primary budget excluding new bond sales and debt servicing costs by the fiscal year to March 2026, which is a "prerequisite" for fiscal reform, the Fiscal System Council said in its proposal.
The council's annual proposal is aimed at providing the basis for debate on next fiscal year's budget as well as this year's extra budget, but any recommendations for fiscal reform may fall on deaf ears with policymakers pressed for boosting spending to spur growth.
Already, Prime Minister Shinzo Abe ordered his cabinet this month to compile a sizable economic package to cope with natural disasters, external risks and support growth after the 2020 Tokyo Olympics. Some ruling party lawmakers have called for additional spending worth $92 billion to fund the package.
The council urged the government to examine carefully what steps would be effective when it comes to roll out fiscal stimulus to respond to large disasters and external risks such as the U.S.-China trade war.
The panel said there's an argument that counts on flexible fiscal spending to stimulate growth with monetary policy hitting its limit. Flexible fiscal policy should not be ruled out as trade and other external risks raise uncertainty, it added.
Still, "we are half way to achieving a primary budget surplus," the panel said. "We must step up efforts to make spending sustainable including social security costs" that support the country's fast-ageing population.
The panel hailed government's move last month to proceed with a twice-delayed sales tax hike to 10% from 8%.
It described the move as a "milepost" in Japan's long way towards sustaining social security and ensuring public finances, suggesting more efforts are needed to gain public understanding for fiscal reform to curb spending and boost tax revenue.
(Reporting by Tetsushi Kajimoto; Editing by Lincoln Feast)
