Japan to consider tapping FX account to boost defence spending - Kyodo

Japan's government is considering tapping funds under an account set aside for foreign exchange intervention to pay for an expected increase in defence spending, Kyodo news agency reported on Tuesday.

Japan's government is considering tapping funds under an account set aside for foreign exchange intervention to pay for an expected increase in defence spending, Kyodo news agency reported on Tuesday. The government could also sell additional bonds until a decision is made on whether to raise taxes as a long-term source of funding for the scheduled spending increase, Kyodo said without citing sources.

Prime Minister Fumio Kishida instructed his ministers on Monday to work on a plan to lift defence spending's share of gross domestic product to 2% within five years, from about 1% now, which would strain Japan's already tattered finances. The increase amounts to roughly 11 trillion yen ($79.42 billion).

The defence ministry and the fiscal hawks of the finance ministry have been at odds over how much the government should spend to bolster Japan's defence capabilities. "A temporary boost to borrowing cannot be helped. Tapping the forex account would be well-timed given marginal gain Japan has reaped from a weak yen," said Koya Miyamae, a SMBC Nikko Securities analyst. "What's important is for Japan to present a plan on debt repayment through tax hikes and spending cuts. Without such efforts, Japan's debt would get out of hand."

A senior government official declined to comment on the media report. The special account that manages foreign reserves has been tapped in the past to fill shortfalls in the general account budget. The proposal highlighted the government's struggle to scrape together defense funding while dealing with the industrial world's heaviest debt burden - more than twice the size of Japan's economy.

The Ministry of Finance has been wary of tapping the surplus funds, as they are used to repay past debt, while the reserves are held in case for intervention in the foreign exchange market. Opposition from within the ruling bloc against tax increases has clouded the prospects for more defense spending, leaving more debt issuance and cuts in other spending as the two other leading options.

Lawmakers at an LDP tax panel meeting on Monday suggested tax breaks including capital gains, a Nippon Individual Savings Account (NISA) tax-free investment scheme to corporate research and investment, start-up businesses, inheritance and gifts. Yoichi Miyazawa, head of the LDP tax commission, told reporters on Monday that he was ready to debate tax increases to fund more defence outlay, but that such talks should wait until the government comes up with estimates on funding sources. ($1 = 138.7000 yen)

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