Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt. Through management of these areas, the Ministry of Finance regulated the allocation of resources in the economy, affected the distribution of income and wealth among the citizenry, stabilized the level of economic activities, and promoted economic growth and welfare.
The Ministry of Finance played an important role in Japan's postwar economic growth. It advocated a "growth first" approach, with a high proportion of government spending going to capital accumulation, and minimum government spending overall, which kept both taxes and deficit spending down, making more money available for private investment. Most Japanese put money into savings accounts, mostly postal savings.
National Budget
In the postwar period, the government's fiscal policy centers on the formulation of the national budget, which is the responsibility of the Ministry of Finance. The Ministry's Budget Bureau prepares expenditure budgets for each fiscal year based on the requests from government ministries and affiliated agencies. The Ministry's Tax Bureau is responsible for adjusting the tax schedules and estimating revenues. The Ministry also issues government bonds, controls government borrowing, and administers the Fiscal Investment and Loan Program (FILP), which is sometimes referred to as the "second budget".
Three types of budgets are prepared for review by the National Diet each year. The general account budget includes most of the basic expenditures for current government operations. Special account budgets, of which there are about forty, are designed for special government programs or institutions where close accounting of revenues and expenditures is essential: for public enterprises, state pension funds, and public works projects financed from special taxes. Finally, there are the budgets for the major affiliated agencies, including public service corporations, loan and finance institutions, and the special public banks. Although these budgets are usually approved before the start of each fiscal year, they are usually revised with supplemental budgets in the fall. Local jurisdiction budgets depend heavily on transfers from the central government.
Government fixed investments in infrastructure and loans to public and private enterprises are about 15% of GNP. Loans from the Fiscal Investment and Loan Program, which are outside the general budget and funded primarily from postal savings, represent more than 20% of the general account budget, but their total effect on economic investment is not completely accounted for in the national income statistics. Government spending, representing about 15% of GNP in 1991, was low compared with that in other developed economies. Taxes provided 84.7% of revenues in 1993. Income taxes are graduated and progressive. The principal structural feature of the tax system is the tremendous elasticity of the individual income tax. Because inheritance and property taxes are low, there is a slowly increasing concentration of wealth in the upper tax brackets. In 1989 the government introduced a major tax reform, including a 3% consumer tax. This tax has been raised to 5% by now.
After the breakdown of the economic bubble in the early 1990s the country's monetary policy has become a major reform issue. US economists have called for a reduction in Japan's public spending, especially on infrastructure projects, to reduce the budget deficit. To force a reduction of the loan program, partially financed through postal savings, thenâ€"Prime Minister Junichiro Koizumi aimed to push forward postal privatization. The postal deposits, by far the largest deposits of any bank in the world, would help strengthening the private banking sector instead.
Budget process
The Budget Bureau of the Ministry of Finance is at the heart of the political process because it draws up the national budget each year. This responsibility makes it the ultimate focus of interest groups and of other ministries that compete for limited funds. The budgetary process generally begins soon after the start of a new fiscal year on April 1. Ministries and government agencies prepare budget requests in consultation with the Policy Research Council.
In the fall of each year, Budget Bureau examiners reviews these requests in great detail, while top Ministry of Finance officials work out the general contours of the new budget and the distribution of tax revenues. During the winter, after the release of the ministry's draft budget, campaigning by individual Diet members for their constituents and different ministries for revisions and supplementary allocations becomes intense. The coalition leaders and Ministry of Finance officials consult on a final draft budget, which is generally passed by the Diet in late winter.
In broad outline, the process reveals a basic characteristic of Japanese political dynamics: that despite the oft-stated ideals of "harmony" and "consensus," interests, including bureaucratic interests, are in strong competition for resources. Political leaders and Budget Bureau officials need great skill to reach mutually acceptable compromises. The image of "Japan Incorporated," in which harmony and unanimity are virtually automatic, belies the reality of intense rivalry. The late-twentieth-century system is successful insofar as political skills and appreciation of common interests minimize antagonisms and maintain a balance of power among groups. It is unclear, however, whether this system will continue as Japan faces such problems as growing social inequality and an aging society.
National debt
In 2011 Japan's public debt was about 230 percent of its annual gross domestic product, the largest percentage of any nation in the world.
In order to address the Japanese budget gap and growing national debt, in June 2012 the Japanese diet passed a bill to double the national consumption tax to 10%. The new bill increases the tax to 8% by April 2014 and 10% by October 2015.
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