By Takaya Yamaguchi and Tetsushi Kajimoto
TOKYO (Reuters) - Japan is committed to putting economic growth before fiscal reform, Prime Minister Fumio Kishida's government said in its draft mid-year policy framework, while signalling an end to crisis-mode stimulus spending to return to one in "peacetime".
The draft plan, which was presented at Kishida's top economic advisory panel on Wednesday, underscored the challenge for the leader, who is seen as a fiscal hawk, to strike a balance between economic growth and fiscal consolidation.
Japan has the industrial world's heaviest public debt that is more than double the size of its economy, the world's third-largest. Like many other countries, it is now facing additional fiscal strains due to heavy spending rolled out to cushion the economic blow from the COVID-19 pandemic.
"As we emerge from the coronavirus crisis and as the economy normalises, we strive to prevent crisis-time fiscal spending from being prolonged, while bringing spending structure back to peacetime," the draft report said.
The closely-watched policy framework will be approved by Kishida's cabinet this month, along with a separate action plan on his "new capitalism" agenda.
"Japan has been an outlier of the global trend that has moved away from crisis-mode stimulus. Policy normalisation is definitely a step in the right direction," said Takahide Kiuchi, executive economist at Nomura Research Institute.
"It's easier said than done though, given his big spending plans with doubling defence and child care spending," he added, noting lawmakers were also bracing for a potential general election.
For the second straight year, the framework dropped a specific timeframe to balance the budget, reflecting a compromise Kishida may strike with reflationary forces within his own Liberal Democratic Party ₍LDP₎. Analysts see the budget-balancing goal as rather symbolic.
"We will not abandon the flag of fiscal reform," Economy Minister Shigeyuki Goto told reporters after the panel's meeting. "There's no change to the government stance of striving to achieve a primary budget surplus in fiscal 2025," Goto added.
Currently, Japan aims to swing a primary budget surplus, which excludes new bond sales and debt-servicing costs, by the fiscal year ending in March 2026.
The target was originally set for the early 2010s but has been delayed four times since then.
Several rounds of heavy stimulus spending to cope with the pandemic pushed up the annual budget from some 100 trillion yen to around 140 trillion yen ($1 trillion) during fiscal 2020 to 2022.
Japan's delay in unwinding fiscal largesse has prompted International Monetary Fund (IMF) to urge the country to pursue fiscal consolidation by meeting any increase in government expenditure with steps to boost revenues.
The framework said the government will conduct a review of any progress of its fiscal reform in the fiscal year 2024 so as to create a medium-term economy and fiscal scheme.
Since he took office in October 2021, Kishida has pledged to achieve a virtuous cycle of growth and redistribution under his "new capitalism" while suggesting that previous administrations' stimulus policies created social division and inequality.
The draft features the expansion of new child care measures and households' assets as well as overhaul of asset management firms. It also seeks labour reform, the need to cope with artificial intelligence (AI), strengthen supply chains and promote start-up firms and green and digital transformation.
"We will realise sustainable growth by mobilising budget, taxation and regulatory reforms, aiming to exit deflation and overcome falling childbirth," it said.
"We will conduct flexible policy while working closely with the Bank of Japan" which aims for the 2% inflation target accompanied by wage hikes.
($1 = 139.4600 yen)
(This story has been refiled to correct the byline)