Japan’s national budget: Procedure and the public debt burden

Japan's budget is compiled by its Ministry of Finance based on estimates from other ministries and guidance from the Cabinet, before being approved by the Diet. In Japan's parliamentary system, the executive is drawn from the majority in the House of Representatives, the Diet's lower house, which generally prevails in budgetary matters over the upper House of Councillors. However, bills for what are known as 'special deficit-financing bonds' require the approval of the House of Councillors, which can delay the budgetary procedure if that house is dominated by the opposition.

Budget-makers are formally constrained by the 1947 Public Finance Act (PFA), Article 4 of which stipulates that the government may only issue 'construction bonds' to finance investment in infrastructure, as opposed to covering ongoing social security spending. This constraint is belied by two major, and interlinked, fiscal challenges facing Japan: the increasing share of social transfers in the budget, which is connected to the ageing of the population and a structural decline in Japan's economic capacity; and an ever-growing gross national debt that, at 246% of GDP, in relative terms already dwarfs that of any other G7 nation.

Almost every year since 1975, governments have circumvented the strictures of the PFA by enacting a law empowering them to issue special deficit-financing bonds, which have since grown to make up the lion's share of the national debt. The current government, led by Shinzō Abe of the Liberal Democratic Party, has set out a plan to arrest the growth in the debt pile by 2020.

Written by Enrico D'Ambrogio and Matthew Parry.