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An exterior view of the Old Building of the Bank of Japan. Completed in 1896, it is now designated as an important cultural property. As of the end of 2008, the Bank of Japan notes issued amounted to approximately 81.5 trillion yen.
Japan's fiscal year starts in April, and ends in March of the following year. In setting the national budget, the government submits a proposed budget for the upcoming fiscal year to the Ordinary Session of the Diet, which begins in January. The proposal is then discussed, and an initial budget is approved usually before the fiscal year begins in April. In the event that the Diet does not approve the budget by the end of March, an interim budget comes into effect. The interim budget is effective from the beginning of April until such time when the proposed budget is approved. If it becomes necessary to amend the budget in the course of a fiscal year, the government submits a supplementary budget for Diet approval.
Japan's national budget consists of the general account, special accounts, and the budget for government-affiliated agencies. Using revenues from general sources such as taxes, the general account covers core national expenditures such as social security, culture/education/science and national defense. Special accounts are accounts established for the national government to carry out projects with specific objectives, and are managed and administered independent of the general account. The number and particulars of special accounts change from year to year; for fiscal 2009, a total of 21 special accounts have been established, including the national debt consolidation fund and the grants of allocation tax and transferred tax. Following a review of the special accounts, they will be reduced to a total of 17 by the end of fiscal 2010. Government-affiliated agencies are entities established by special laws and are entirely funded by the government. They were subject to a major consolidation in October 2008. As of 2009, the Japan Finance Corporation, the Okinawa Development Finance Corporation, and the Japan International Cooperation Agency (Loan Aid Function) are operated as government-affiliated agencies.
With regard to local government finance, Japan has approximately 1,850 local governments, including prefectural governments and municipalities (see Figure 17.3), which all have their own fiscal operations. Since revenue sources differ among local governments, the national government distributes "local allocation tax grants" to offset and balance the disparity between local governments. Under this scheme, the government allocates part of its national tax revenue to local governments by shifting certain percentages of income tax, corporation tax, liquor tax, consumption tax, and tobacco tax revenue from the national account to local accounts. The scheme ensures that the local governments retain their independence to plan and manage their local administrations.
The net total indicates the actual amount of governmental expenditures after eliminating duplications such as the transfer of funds between different accounts in the national budget, the local allocation tax grants and other subsidies from the national government to local governments. In the initial budget for fiscal 2008, the gross total of national government expenditure was 453 trillion yen. However, after eliminating duplications, the net total was 214 trillion yen. Furthermore, the local public finance program, which consists of the estimated sum of ordinary accounts for the following fiscal year for all local governments, amounted to 83 trillion yen. Therefore, after eliminating duplications between national and local accounts (28 trillion yen), the net total of both national and local government expenditures combined was 270 trillion yen.
While expenditures such as national defense are administered solely by the national government, a large portion of expenditures that directly relate to the people's everyday lives are disbursed chiefly through local governments. In particular, a high proportion of the following expenditures are disbursed through local governments: public hygiene and sanitation expenses, which include areas such as medical service and waste disposal; education expenses; expenses covering judicial, police and fire fighting services; and welfare expenses, which cover the development and management of welfare facilities for children, the elderly and the mentally and physically challenged.
Of the 266.2 trillion yen, which was the net total of national and local government expenditures in fiscal 2007, approximately half was for expenditures "directly relate to the people's everyday lives." The national government disbursed 41 percent of this amount, while the local governments disbursed 59 percent.
With regard to the breakdown of the net total expenditure by function, social security expenditure accounted for the largest portion (27.9 percent), followed by public bonds (21.6 percent), land preservation and development (13.2 percent), and then education (13.1 percent). The high proportion of expenditure related to public bonds resulted from the increased issue of public bond instruments by national and local governments, done mainly to fund programs for stimulating economic recovery and to make up for shrinking tax revenue, both since fiscal 1992.
This section will review the general account expenditure of the national government budget, which covers core national expenditures such as social security and education, etc.
The size of the general account budget expenditure expanded to 89.32 trillion yen in fiscal 2000. This expansion was caused by the increasing costs of social security, which have been triggered by the rapidly aging society, and a series of economic measures implemented after the collapse of the bubble economy. Since then, the national government finance has been facing severe difficulties.
The size of the general account budget for fiscal 2009 was 88.55 trillion yen, an increase of 5.49 trillion yen (6.6 percent) from the initial budget of fiscal 2008. This is equivalent to 17.4 percent of the fiscal 2009 GDP, forecasted by the government at 510.2 trillion yen.
In fiscal 2009, major expenditures from the initial general account budget include social security (28.0 percent), national debt service (22.9 percent), local allocation tax grants, etc. (18.7 percent), public works (8.0 percent), and education and science (6.0 percent).
With regard to revenue sources for the fiscal 2009 initial general account budget, income tax, corporation tax and consumption tax account for 40.9 percent. Even with the addition of other taxes and stamp revenues, these revenue sources only amount to 52.1 percent of the total revenue. In order to cover the deficit, the government issues construction bonds and special deficit-financing bonds.
The ratio of outstanding general government debt to GDP is a financial measure of the stock accounts. This ratio is stable or declining in other major industrialized countries as a result of steady efforts to improve their financial soundness. In Japan, however, it is increasing sharply due to yearly issuance of government bonds, and has climbed to a point higher than in any other major industrialized country.
There are two budget categories in the local government finance: the ordinary account and the public business accounts. The former covers all kinds of expenses related to ordinary activities of the prefectural and municipal governments. The latter covers the budgets of independently accounted enterprises such as public enterprises (water supply and sewerage utilities, hospitals, etc.), the national health insurance account and the health care account for the elderly.
The revenue composition of local governments usually remains almost the same each fiscal year, while their budget scale and structure vary from year to year. The largest portion of fiscal 2006 (net) revenues came from local taxes, accounting for 39.9 percent of the total. The second-largest source, 17.5 percent, was local allocation tax grants, which are transfers from the national government to guarantee a funding source to provide standard administrative services and basic social infrastructure to residents of all regions. Local governments with stable tax revenues do not receive local allocation tax grants, though such comprise a large proportion of revenues in financially-fragile local governments.
Taxes consist of national tax (income tax, corporation tax, etc.), which is paid to the national government, and local tax, which is paid to the local government of the place of residence. The ratio of taxation burden, which is the ratio of national and local taxes to national income, was 18.3 percent in fiscal 1975. This ratio gradually increased thereafter, reaching 27.6 percent in fiscal 1990. Since then, however, the ratio has decreased due to the decline in tax revenue arising from the recession that ensued after the bubble economy ended, showing 21.8 percent in fiscal 2003. In fiscal 2009, it was 23.0 percent in terms of national and local taxes combined (13.0 percent for national tax and 10.0 percent for local tax). Japan's ratio is lower in comparison with other major industrial countries. Nevertheless, it has become heavier due to an increase in welfare and pension-related spending owing to the rapidly aging society.
As the central bank, the Bank of Japan (i) issues Bank of Japan notes, or the currency of Japan; (ii) manages and stores treasury funds and provide loans to the government; (iii) provides deposit and loan services to general financial institutions; and (iv) implements monetary policies by adjusting the level of money stock to promote sound development of the economy.
At the end of 2008, currency in circulation totaled 86.07 trillion yen (81.48 trillion yen in Bank of Japan notes and 4.59 trillion yen in coins), up 0.2 percent from the year before.
The Bank of Japan reviewed the Money Stock Statistics in June 2008. Major statistical indices that are now shown are: (i) M1, or cash currency in circulation plus deposit money; (ii) M2, or cash currency in circulation plus deposits in banks, etc. in Japan; (iii) M3, or M1 plus quasi-money plus CDs (certificates of deposit); and (iv) broadly-defined liquidity, which covers a broad range of liquidity, including government bonds. The average outstanding money stock as of December 2008 was 482 trillion yen in M1 and 742 trillion yen in M2.
The basic discount rate and basic loan rate (previously referred to as "official discount rate") is the interest rate on loans charged by the Bank of Japan to financial institutions. The rate was frozen at 0.50 percent for the period from September 1995 to February 2001. However, it was subsequently lowered gradually, reaching 0.10 percent in September 2001, and this extremely low interest rate level was maintained for several years. In view of Japan's recent economic recovery, the rate was raised in stages, up to 0.4 percent in July 2006, and 0.75 percent in February 2007. However, the rate was cut in stages to address the rapidly deteriorating economy, down to 0.50 percent in October 2008 and to 0.30 percent in December of the same year.
In addition to the Bank of Japan, Japan's financial system is comprised of private and public financial institutions. Private financial institutions include those that accept deposits (banks, credit depositories, agricultural cooperatives, etc.) and those that do not (securities companies, insurance companies, etc.).
As to the latest number of offices, including the branches of financial institutions operated domestically, post offices handling postal savings had the largest network with 24,180 offices. This was followed by domestically licensed banks, including city banks and regional banks, with a combined total of 13,480 offices and branches. Securities companies operated at 2,296 offices including branches. Major banks accelerated mergers and restructuring in the process of financial system reform, and have now generally come to an end. Regional banks and credit depositories, though, have still expanded their business base through mergers.
For a long time, the business role of each type of financial institution had been clearly divided and regulated by specialized systems. However, the deregulation and reform of financial systems--known as the Big Bang--produced dramatic changes overseas, eventually causing significant alterations in the Japanese financial system. A rapid surge in asset prices from the mid-1980s and the following correction of asset prices in the 1990s created a massive expansion of loans and huge bad debts in their wake. In the financial crisis between 1997 and 1998, several large financial institutions went bankrupt. In 1998, laws were enacted to stabilize the financial system, and measures including temporary government control were developed to deal with bankrupt financial institutions.
In order to lead a revival of the nation's economy by solving the bad debt problems of major banks, the government launched the Program for Financial Revival in October 2002, demanding that major banks reduce their ratio of bad debts from 8.4 percent in March 2002 to approximately half that level by March 2005. As a result, the ratio of the major banks' bad debts decreased to 2.9 percent in March 2005, meeting the government's target. Furthermore, it decreased to 1.4 percent in March 2008, and thus the bad debts problem has been settled.
The Flow of Funds Accounts Statistics, which is a comprehensive set of records of financial transactions, assets and liabilities, indicates that financial assets in the domestic sectors totaled 5,409 trillion yen according to preliminary figures at the end of March 2009. Of these assets, those of the domestic nonfinancial sector were 2,709 trillion yen. The household sector (including the business funds of sole proprietorships) had assets of 1,410 trillion yen, in the forms of deposits, stocks and other financial assets. In Japan, the household sector holds more than 50 percent of its financial assets in cash or relatively secure forms of assets.
Stock prices in Japan rose sharply in the latter half of the 1980s, spearheading the bubble economy. The stock market, however, started to fall in 1990 ahead of land prices. At the end of 1989, the total market value of the first section of the Tokyo Stock Exchange was 591 trillion yen, but only three years later, at the end of 1992, it dropped by more than 50 percent to 281 trillion yen. The market recovered to reach 442 trillion yen at the end of 1999, but dipped again in 2000. Then in 2003, stock prices recovered reflecting improved corporate earnings and a positive turn-around in plant and equipment investment. At the end of 2006, the total market value of the first section of the Tokyo Stock Exchange reached 539 trillion yen. However, in August 2007, stock price drops in the U.S.A. and Europe mainly from concerns over subprime housing loan problems caused stock prices in Japan to fall as well. As a result, the equivalent total market value was 279 trillion yen at the end of 2008.
At the end of March 2009, the total number of individual stockholders (individuals of Japanese nationality and domestic groups without corporate status) in possession of stocks listed on the Tokyo/Osaka/Nagoya/ Fukuoka/Sapporo Stock Exchanges totaled 42.2 million. In value terms, the ratio of stocks they possessed was 20.1 percent. As of the end of March 2009, the ratio of Japanese stocks held by foreign investors (total of corporations and individuals) marked 23.6 percent in value terms. This was the second consecutive yearly decrease representing a drop of 4.0 percentage points, the greatest since the count began in 1970.
A characteristic of the stock market in Japan is that the proportion of stocks owned by individual Japanese investors is extremely small. Recently, however, the number of individual investors is on the rise as the greater popularity of Internet trading has prompted more people to start investing in stocks.
A survey conducted of 321 securities firms by the Japan Securities Dealers Association (JSDA) showed that 17.8 percent of those companies offered Internet trading at the end of March 2009. Internet trading thus accounted for 24.7 percent of the total value of stock brokerage transactions from the period of October 2008 to March 2009.
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