Kan to cap bond sales at $534 bn

Japanese Prime Minister Naoto Kan plans to cap new bond sales at ¥44.3 trillion ($534 billion) in 2011 to finance a record budget as he tries to spur corporate demand and bolster growth.

The country’s budget will climb to ¥92.4 trillion in the year starting April 1, according to a proposal approved by the Cabinet in Tokyo today. Kan has pledged to keep bond sales unchanged for three years to curb the industrialised world’s largest debt burden.

Kan’s budget juggles the need to stimulate demand in an economy hit by the yen’s climb to a 15-year high and deflation, and bring down a debt burden about twice the size of gross domestic product. Increasing the sales tax to improve Japan’s finances may not be feasible because it may risk a further decline in his popularity, Nikko Cordial Securities said.

“Given the political situation, it will be difficult for Kan to discuss a sales tax increase,” said Hidenori Suezawa, chief strategist at Nikko Cordial Securities in Tokyo. “There’s no doubt the government will have a tougher time compiling the budget next year as social-security costs swell and it runs out” of revenue sources.

Japan’s economy is expected to contract this quarter as government stimulus measures that bolstered spending expire and the strong yen threatens exporter profits. The government said this week it was forecasting growth to slow to 1.5 per cent next fiscal year from 3.1 per cent.

The yield on the benchmark 10-year bond rose to 1.16 per cent at 6.56 pm in Tokyo.