Japan's government is likely to cut spending plans pledged in its election campaign as it scrambles to keep next year's budget under control, putting more burden on the central bank to avert a deflation-led downturn next year. Bank of Japan Governor Masaaki Shirakawa offered few clues on Thursday on his policy options, although he promised that the central bank would act promptly and decisively if financial markets were to become unstable. The government and the BOJ have clashed over how to deal with deflation, which the central bank forecasts will last at least three years, as policymakers fret it could drag down the economy just as it is emerging from the global financial crisis. The BOJ buckled earlier this month, calling an emergency meeting to announce a new short-term funding facility and last week underlined its deflation-fighting credentials by declaring it would tolerate nothing but price growth. Now, with the government cutting its spending plans to appease worried investors and keep a ratings downgrade at bay, the onus may swing once again to the BOJ. “The BOJ will most likely face pressure to do more,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “They felt they needed to make some noise about the yen's rise, and in a certain sense they succeeded. They could try buying more securities, bonds or other credit facilities.” Japan's public debt is rising towards 200 percent of GDP, the biggest in the developed world. In office for just three months, the Democratic Party-led government is keen to avoid a worsening economy before upper house elections in mid-2010. Dithering over budget and other decisions has already undermined government popularity. Cabinet ministers have said they hope to approve next fiscal year's budget on Friday. Prime Minister Yukio Hatoyama abandoned a campaign pledge on Monday to abolish a gasoline surcharge in order to support revenues and keep new bond issuance in the fiscal year starting April 1 from exceeding 44 trillion yen ($482 billion). It risks a Fitch ratings downgrade if it borrows much more in fresh issuance.The 2010/11 spending is set to exceed 92 trillion yen, a lawmaker from a small ruling coalition party said on Thursday. That is roughly in line with a Nikkei report saying spending would be around 92 trillion, which would be a record but still less than initial spending plans of 95 trillion yen. The Nikkei newspaper reported on Thursday that more than half of 7.1 trillion yen in spending the government had pledged in its election campaign for major policy initiatives in 2010/11 will now be cut from the final budget.
