TOKYO – The Japanese government is considering tapping funds in an account earmarked for foreign exchange interventions to pay for an expected increase in defense spending, Kyodo news agency reported on Tuesday.
The government could also issue additional bonds pending a decision on whether to collect taxes as a long-term source of funding for the planned spending increase, Kyodo said, without citing sources.
Prime Minister Fumio Kishida on Monday instructed his ministers to work on a plan to raise defense spending as a percentage of GDP to 2% from the current level of around 1% within five years, which would weigh on Japan’s already struggling finances. The increase amounts to around 11 trillion yen ($79.42 billion).
The Department of Defense and the Treasury Department’s fiscal hawks have been at odds over how much the government should spend to bolster Japan’s defense capabilities.
A senior government official declined to comment on the media report. The special account, which manages foreign exchange reserves, has been tapped in the past to cover deficits in the general account budget. The fund reaps 2 trillion to 3.5 trillion yen ($14 to 25 billion) in retained earnings annually, Kyodo reported.
The proposal highlighted the government’s struggle to scrape together defense funding while managing the heaviest debt burden in the industrial world – more than twice the size of the Japanese economy.
The Treasury has been wary of tapping into the excess funds as they are held in case foreign exchange market intervention is needed.
Opposition within the ruling bloc to tax hikes has clouded prospects for more defense spending, so issuing more debt and cutting other spending are the other two leading options.
Lawmakers at an LDP tax panel meeting on Monday proposed tax breaks including capital gains, a tax-free Nippon Individual Savings Account (NISA) investment program for corporate research and investment, start-up businesses, inheritance and gifts.
Yoichi Miyazawa, head of the LDP tax commission, told reporters Monday he was ready to debate tax hikes to fund more defense spending, but that such talks should wait until the government provides estimates on funding sources. – Reuters