Japan sees faster progress in balancing budget despite pandemic

© Reuters. FILE PHOTO: A Japan yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

By Leika Kihara

TOKYO (Reuters) - Japan brought forward the expected timing for achieving a primary balance surplus by two years to fiscal 2027 due to a surprise rise in tax revenues, even as the coronavirus pandemic hobbled a fragile economic recovery.

The new estimate, released on Wednesday, still leaves the government struggling to hit its goal of achieving a surplus by fiscal 2025, which many analysts see as unrealistic given the huge cost of shielding the economy from the pandemic's pain.

Policymakers are faced with a tricky balancing act as they seek to pull Japan out of the pandemic-induced doldrums, while reining in a public debt that has ballooned to twice the size of its economy.

In long-term fiscal projections approved by its top economic council, the government expects to Japan's primary budget - excluding new bond sales and debt service costs - to swing back to a surplus in the fiscal year 2027 ending in March 2028.

That is faster than the fiscal 2029 projected in the previous estimate in January, and reflects a recent rise in tax revenues as manufacturers benefited from robust global demand.

But the projection is based on the assumption that the economy will grow an average 2% due to the effect of the government's strategies, according to the document.

Under a more realistic "baseline" scenario assuming average growth of 1%, Japan will still be saddled with a budget deficit of 6.2 trillion yen ($56.42 billion) in fiscal 2027, it showed.

"To overcome challenges that became evident during the battle with the pandemic, Japan must steadily proceed with spending and revenue reforms to achieve its fiscal target for fiscal 2025," private-sector members of the top council said.

In the fiscal blueprint issued in June, the government stuck to the fiscal 2025 goal but said it will reassess the timeframe given the huge cost to combat the pandemic.

Calls to ditch or delay the 2025 target may intensify in coming months, as some ruling party lawmakers have called for another big pandemic-relief package to lure voters ahead of a lower house election expected later this year.

Tokyo has deployed massive stimulus packages totaling $3 trillion over the past year to combat the pandemic, further straining public finances by adding to the debt pile that is the biggest among major industrialised nations.

($1 = 109.8900 yen)