Japanese Public Finance Fact Sheet

2014

Ministry of Finance

Table of Contents Ⅰ. Current Fiscal Situation 1. General Account Budget for FY2014 ･････････････････････････････････1 Column: Comparison of the Government Budget to a Household Budget ･･･3 2. Trends in General Account Expenditures and Tax Revenues ･････････････4 3. Accumulated Government Bonds Outstanding ･･････････････････････････5 4. Long-term Debt Outstanding of Central and Local Governments ･･･････6 5. International Comparison of Fiscal Conditions ･････････････････････7 6. Factors for Increase in Government Bonds Outstanding ･････････････11 7. Aging Population and Increase in Social Security Benefits ････････13 8. Government Revenues and Expenditures in OECD Member Countries ････14

Ⅱ. Need for Fiscal Consolidation 9. Problems of Fiscal Deficit ･･･････････････････････････････････････17 10. Environment Surrounding the Government Bonds ･････････････････････18 11. Fiscal Consolidation Measures Taken by Countries Immersed in Public Finance Crises and Its Impact on the Public ･･････････････････････21 12. Increase in Interest Rates Due to Loss of Confidence in Public Finance – the European Debt Crisis – ･････････････････････････････24

Ⅲ. Measures toward Fiscal Consolidation 13. Clear Trajectory to Fiscal Consolidation ･････････････････････････27 14. The Status of Achievement of the Fiscal Consolidation Target in Projections by Cabinet Office (July 2014) ･････････････････････29 15. Indicators used to set the Objectives of Fiscal Consolidation ････････30 16. International Trends toward Fiscal Consolidation ･････････････････32 17. Comparison in Targets for Fiscal Consolidation in Major Advanced Countries ････････････････････････････････････････････････････････33

Ⅳ. Aging Population and The Comprehensive Reform of Social Security and Tax 18. The Future Prospect of Aging Population ･･････････････････････････37 19. International Comparison of Population Aging Rate and Tax and Social Security Contributions Ratio ･･････････････････････････････39 20. The Comprehensive Reform of Social Security and Tax ･･････････････41

Ⅴ. Details of each policy area 1. Social Security ･･････････････････････････････････････････････････45 2. Education, Science and Technology ････････････････････････････････51 3. Central and Local Governments ････････････････････････････････････53 4. Public Works ･････････････････････････････････････････････････････56 5. National Defense ･････････････････････････････････････････････････58 6. Official Development Assistance ･･････････････････････････････････59 7. Agriculture, Forestry and Fisheries ･･････････････････････････････60 8. Measures for Small and Medium-size Enterprises ･･･････････････････61 9. Measures for Environment and Energy ･･････････････････････････････62 10. Personnel Cost of National Public Servants ･･･････････････････････63 Supplement 1. Special Accounts ･･･････････････････････････････････････64 Supplement 2. Thorough Improvement of Budget Efficiency ･･････････････68 (Reference) Trend in Fiscal Situation ････････････････････････････････69

Ⅰ. Current Fiscal Situation

With regard to the general account budget, about the half of total revenue is financed by issuing government bonds, which means that the burden lies on future generations to repay the debt. This unfavorable situation has been continuing and the outstanding of the government debt has been accumulated. Under the situation where the ratio of long-term debt of national and local governments to GDP exceeds 200% and the trajectory of increasing the government debt continues, it means that the public finance will be unsustainable. Fiscal System Council “Basic Concept towards Fiscal Consolidation (May 30, 2014)”

1. General Account Budget for FY2014 (1) Breakdown of Expenditures The general account budget for FY2014 was about 95.9 trillion yen. Moreover, the analysis of expenditures shows that national debt services, local allocation tax grants and social security account for over 70% of the total expenditures. （Unit：billion yen） FY2014 initial budget

National Debt Service 23,270.2 24.3%

Interest Payments 10,131.9 10.6%

Redemption of the National Debt 13,138.3 13.7% Others 9,656.8 10.1%

Social Security 30,517.5 31.8%

General Account Total Expenditures 95,882.3 （100.0%）

National Defense 4,884.8 5.1%

Public Works 5,968.5 6.2% Education & Science 5,442.1 5.7%

Food Supply Promotion of SMEs Energy Former Military Personnel Pensions Economic Assistance Miscellaneous Contingency Reserves

1,050.7 (1.1) 185.3 (0.2) 964.2 (1.0) 444.3 (0.5) 509.8 (0.5) 6,152.6 (6.4) 350.0 (0.4)

1

Local Allocation Tax Grants, etc. 16,142.4 16.8%

Primary Expenses 72,612.1 75.7%

(2) Breakdown of Revenues The tax revenue included in the annual government revenue for the general account budget for FY2014 is expected to be approx. 50 trillion yen. The tax revenue constitutes about 50% of the annual government revenue, and the debts (the revenue generated by government bonds) which will be the burden borne by future generations also constitute more than 40%.

（Unit：billion yen） FY2014 initial budget

Government Bond Issues 41,250.0 43.0%

Income Tax 14,790.0 15.4%

Special Deficit financing Bonds 35,248.0 36.8%

General Account Total Revenues 95,882.3 （100.0%） Construction Bonds 6,002.0 6.3%

Corporation Tax 10,018.0 10.4%

Tax and Stamp Revenues 50,001.0 52.1% Consumption Tax 15,339.0 16.0%

Others 9,854.0 10.3%

Other Revenues 4,631.3 4.8%

Gasoline Tax Liquor Tax Inheritance Tax Tobacco Tax Customs Duties Petroleum and Coal Tax Motor Vehicle Tonnage Tax Other Taxes Stamp Revenues

2

2,545.0 (2.7) 1,341.0 (1.4) 1,545.0 (1.6) 922.0 (1.0) 1,045.0 (1.1) 613.0 (0.6) 387.0 (0.4) 400.0 (0.4) 1,056.0 (1.1)

Column: Comparison of the Government Budget to a Household Budget Assuming the average family of three which consists of baby-boomer parents and one child, they annually spend ¥9.59 million while their annual total income is ¥5.46 million. Most of their expenses are for pension, medical care, long-term care, sending money back home and loan repayment. As a result, the family newly borrows more than ¥4 million each year and the loan’s balance reaches to ¥81 million yen. (The common image of family in Japan) ・ Parent generation will become the elderly aged 75 or over (→further increase in medical and long-term care expenditures in the future) ・ The average number of child is 1.7 due to the low fertility

Grand father (79)

Grand mother (74)

Grand father (67)

(The average household in Japan) ・ average annual income ¥5.37 million ・ borrowings: ¥4.38 million (tend to be large in 40’s) ・ savings ¥10.47 million (Most of them are held by elderly family）

Husband (43)

Loan’s balance: ¥81.07 million balance of housing loans: ¥26.02 million balance of loans for living expenses: ¥55.05 million

Grand mother (65)

Wife (40)

Child (13)

The expenses for pension, medical care and long-term care continue to increase by ¥0.1 million each year ¥2.33 million ¥3.05 million in accordance with the aging for Loan Repayment Pension, Medical parent generation. （principal: ¥1.31 million Care and Long-term interest: ¥1.01million） Care, etc. There is a large imbalance Total Expenditures between total expenditures and income. ¥9.59 million

¥1.45 million Other Living Expenses

¥1.61 million

¥0.54 million Education

Sending Money Back Home

¥0.6 million Housing Expense

¥4.13 million

¥5.46 million Total Revenues Borrowing ¥9.59 million Wage Income

Interest rate remains relatively low at present, but if it rises, the interest payment will dramatically increase. It is difficult to borrow money from banks due to its high debt level.

3

2. Trends in General Account Expenditures and Tax Revenues Japan continues to run budget deficits where expenditures exceed tax revenues. In particular, the difference between expenditures and revenues has been expanded since FY2008 due to lowered tax revenues associated with the economic downturn. In FY2009 and thereafter, the amount of government bonds issued frequently exceeded tax revenues. From FY2013, tax revenues exceeded the amount of government bonds for the first time in four years in the initial budget basis. (trillion yen)

120

101.0 100.7 100.2 97.1 95.9

100

95.3

89.0 89.3 84.9 84.8 83.7 82.4 81.4 85.5

84.4 78.8 75.1 75.9 73.6 70.570.5 69.3 65.9

80

61.5

60 53.0 50.651.5

57.7 53.6

34.1

24.5

23.7 21.9

20.9

20

17.3 15.7 13.8 9.6 5.3

7.2

Total Revenues

0

51.0 49.1

52.0

14.0

14.2 12.9 7.0

13.5

Special Deficit-Financing Bond Issues 18.4

19.9

35.0

33.0

42.8 43.9 41.5 42.3 42.8 38.7

35.3 35.5

6.2 6.9

6.3 7.2 5.9 7.0 6.7 6.4 6.0 5.0

2.5

10.7

9.5 7.2 6.6 6.3 6.7

6.7 9.1

8.7

11.1

27.5

9.1

7.0

6.4 6.0

0.2

9.9

24.3 16.9

25.8 21.9 20.9

28.7

26.8 23.5

34.7 34.4 36.0 33.8 35.2

26.2 21.1

19.3

12.3

9.5 6.2 6.4 6.3 6.7 1.0

6.0 7.0

25.4

7.8

18.5

16.4 16.2

40.9 41.3

11.4 7.6 8.4

33.2

36.9 13.2

9.4 7.0 6.8 6.4 6.3 7.0

47.5

15.0

31.3

30.0 13.2

17.0

12.8 12.3 11.3

50.0 47.0

44.3

16.2 13.5

7.1

4.5 4.3 2.1 3.5

49.1 45.6

37.5 34.0

3.7 3.2

53.9 51.9 50.7 51.0 49.4 52.1 47.2 47.9

Construction Bond Isuues

10.7

5.0 6.3

54.4 54.1

41.9

34.9 32.4 30.5 29.0 26.9

29.1

Total Expenditures

43.8 43.3

38.2

40

54.9

46.8

43.4 38.8

84.7 81.8

60.1 59.8

50.8

46.9 47.2

78.5

9.2 8.5 0.8 2.0

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY)

(Note 1) FY1975-2013: Settlement, FY2014: Budget (Note 2) Following various bonds are excluded: Ad-hoc Special Deficit-Financing Bonds issued in FY1990 as a source of funds to support peace and reconstruction activities in the Persian Gulf Region, Tax Reduction-related Special Deficit-Financing Bonds issued in FY1994-1996 to make up for decrease of tax revenues due to a series of income tax cuts preceding consumption tax hike from 3% to 5%, Reconstruction Bonds issued in FY2011 as a source of funds to implement measures for the reconstruction from the Great East Japan Earthquake, Pension-related Special Deficit-Financing Bonds issued in FY2012-2013 as a source of funds to achieve the targeted national contribution to one-half of basic pension.

4

3. Accumulated Government Bonds Outstanding Japan’s government bonds outstanding have been increasing year after year. The government bonds outstanding are estimated to rise to ¥780 trillion at the end of FY2014, which amount 16 times as large as Japan’s annual tax revenues and will surely impose heavy burdens on future generations. (trillion yen)

(%)

850

156.9% 160.0

800

Equivalent to approx. 16 years of General Account Tax Revenues

750

(Tax Revenues in FY2014 General Account Budget: Approx. ¥50 trillion)

780

Reconstruction Bonds

700 650 600 550 500 450

FY2014 Government Bonds Outstanding Approx. ¥780 trillion (projection) ↓

104.3%

150 100 50 0

120.0

238 546 541

532 527 237225 499247243

Approx. ¥6.15 million per person Approx. ¥24.59 million per family of 4 Average disposable income of a working family Approx. ¥5.11 million

100.0 509

241 457

Construction 477 Bonds 445

421226 392222

390

332209

258187 245 225

42.4%

175

80.0

411

368 216

(Note) Disposable income and family size are based on the "FY2010 Survey of Household Economy" by the Ministry of Internal Affairs and Communications.

295197

200

140.0

246 594

300 250

10 670 250 11 636 248

Government bonds outstanding to GDP (right scale)

400 350

11 744 260 9 705258

356 321 305 288 280

60.0

258

207 168 231 36.2% 193 158 178 142 172 199 161166 131 152157 145 116 176 108 134 97 102 158 122 87 91 81 110 134 75 96 69 82 63 108 71 56 56 83 49 77 43 42 32 65 65 64 65 64 63 61 64 67 64 59 35 22 53 15 47 28 8 10 40 22 0 1 2 2 2 3 4 6 17 33 13 5 15 21 28 2 10 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Special DeficitFinancing Bonds

40.0

20.0

0.0

(As of the end of FY) (Note 1) FY1965-2013: Actual, FY2014: Estimate (Note 2) Special Deficit-financing Bonds outstanding include refunding bonds for long-term debts transferred from JNR Settlement Corporation, the National Forest Service, Ad-hoc Special Deficit-financing Bonds, Tax-reduction-related Special Deficit-financing Bonds and Pension-related Special Deficitfinancing Bonds. (Note3) Government Bonds Outstanding includes Reconstruction Bonds (FY2011 in General Account. FY2012 and thereinafter in Special Account for Reconstruction from the Great East Japan Earthquake) issued as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake in FY2011 – FY2014 (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 9.0 trillion yen, FY2014: 11.4 trillion yen). (Note 4) The estimate of FY2014 excluding front-loading issuance of refunding bonds is approx. 755 trillion yen.

5

4. Long-term Debt Outstanding of Central and Local Governments In addition to the “government bonds outstanding” (3.), there is another “long-term debt” whose interest payment and redemption funds are covered mainly by tax revenues. The total of longterm debt outstanding of central and local governments is expected to reach 1,010 trillion yen (202% of GDP) at the end of FY2014. It is the first time that the long-term debt outstanding exceeds 1,000 trillion yen. (unit: trillion yen)

Central government

As of end FY1998

As of end FY2003

As of end FY2008

As of end FY2009

As of end FY2010

As of end FY2011

As of end FY2012

As of end FY2013

As of end FY2014

Approx. 390

Approx.493

Approx. 573

Approx. 621

Approx. 662

Approx. 694

Approx. 731

Approx. 770

Approx. 811

(Approx. 387) (Approx. 484) (Approx. 568) (Approx. 613) (Approx. 645) (Approx. 685) (Approx. 720) (Approx. 747) (Approx. 786)

Government Approx. 295 Approx. 457 Approx. 546 bonds outstanding (General bonds (Approx. 293) (Approx. 448) (Approx.541) outstanding) As a percentage of GDP

Local government As a percentage of GDP

Approx. 594

Approx. 636

Approx. 670

Approx. 705

Approx. 744

Approx. 780

(Approx. 586) (Approx. 619) (Approx. 660) (Approx. 694) (Approx. 721) (Approx. 755)

58%

91%

112%

125%

133%

141%

149%

155%

156%

( 57% )

( 89% )

( 110% )

( 124% )

( 129% )

( 139% )

( 147% )

( 150% )

( 151% )

Approx. 163

Approx. 198

Approx. 197

Approx. 199

Approx. 200

Approx. 200

Approx. 201

Approx. 201

Approx. 200

32%

40%

40%

42%

42%

42%

43%

42%

40%

Central and Local Approx. 553 Approx. 692 Approx. 770 Approx. 820 Approx. 862 Approx. 895 Approx. 932 Approx. 971 Approx. 1,010 government (Approx. 550) (Approx. 683) (Approx. 765) (Approx. 812) (Approx. 845) (Approx. 885) (Approx. 921) (Approx. 948) (Approx. 985) As a percentage of GDP

108%

138%

157%

173%

179%

189%

197%

202%

202%

( 108% )

( 136% )

( 156% )

( 171% )

( 176% )

( 187% )

( 195% )

( 197% )

( 197% )

(Note 1) GDP for FY1989-FY2012: Actual, FY2013: Estimate, FY2014: Projection. (Note 2) Government Bonds Outstanding includes reconstruction bonds issued (FY2011: in General Account, after FY2012: in Special Account for Reconstruction from the Great East Japan Earthquake) as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 9.0 trillion yen and FY2014: 11.4 trillion yen) and Pension-related Special Deficit-Financing Bonds as a source of funds to achieve the targeted national contribution to one-half of basic pension (FY2012: 2.6 trillion yen, FY2013: 5.2 trillion yen, FY2014: 4.9 trillion yen). (Note 3) Figures in parentheses do not include front-loading issuance of refunding bonds. (Note 4) The borrowings in the Special Account for Local Allocation and Local Transfer Tax are shared by the central and local governments in accordance with their shares of redemption. The amount of the borrowings outstanding incurred by the central government was transferred to the general account at the beginning of FY2007, so that the borrowings outstanding in the Special Account since the end of FY2007 is the debt of the local governments (FY2014: approx. ¥33 trillion). (Note 5) For the end of FY 2012, local regions are expected to be based on the local government bonds plan, etc. (Note 6) Further, government debts are approx. 101 trillion yen according to the Special Account for Fiscal Investment and Loan Program as of the end of FY2014.

(Reference) Some categories of “Debt outstanding” in various statistics The total of long-term debt whose interest payment and redemption funds are mainly covered by tax revenues is calculated.

Government bonds and borrowings outstanding shows the overview of financing activities such as raising funds from capital markets. 1,144 trillion yen （1,119 trillion yen）

971 trillion yen （946 trillion yen）

1,010 trillion yen (985 trillion yen)

1,142 trillion yen FB (Financing Bill): 199

Social security funds: 11 Local governments: 191

Local governments: 200 Local bonds: 145

The financial liabilities of general government (the central government, local governments and social security funds) are systematically totaled up based on SNA in order to keep track of the actual economic situation and contribute to international comparisons.

including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax

Borrowings in the Special Account for Local Allocation Tax: 33

FILP (Fiscal Investment and Loan Program) bonds: 101

Independent administrative agencies, etc.: 16

including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax

including 47 trillion yen in discount T-Bills

T-Bills: 162

General government liabilities

The total of debt of central and local governments that are explicitly and logically linked to general policy expenditures are calculated.

Borrowings: 30

Borrowings: 63

Government bonds outstanding ［General bonds］: 780 (755)

Government bonds outstanding ［General bonds］: 780 (755)

Government bonds outstanding ［General bonds］: 780 (755)

(1) Public debt outstanding of central and local governments

(2) Long-term debt outstanding of central and local governments

(3) Government bonds and borrowings outstanding









【Office for Econometric Analysis, Cabinet Office】

【Research Division, Budget Bureau, M inistry of Finance】

【Debt M anagement Policy Division, Financial Bureau, M inistry of Finance】

【Economic Social Research Institute, Cabinet Office】

Borrowings in General Account: 13

including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax

Borrowings: 68 Government bonds ［excluding Treasury Discount Bill］: 694

(4) General government gross debt

(Note 1) “Special Account for Local Allocation Tax” refers to “Special Account for Local Allocation Tax and Local Transfer Tax”. (Note 2) The figures in parentheses in item (2) and (3) do not include the front-loading issuance of refunding (25 trillion yen). (Note 3) Government bonds outstanding [ordinary government bonds] as of the end of FY2014 includes Reconstruction Bonds (11.4 trillion yen). (Note 4) Borrowings in the General Account in item (1) are part of the Borrowings in the Special Account for Local Allocation Tax which is transferred to the General Account. (Note 5) Long-term debt outstanding of local governments in item (2) includes local bonds, borrowings in the Special Account for Local Allocation Tax and local public corporation (22 trillion yen) charged to the ordinary account. (Note 6) Borrowings in item (2) and (3) = borrowings + subscription bonds, etc. Borrowings in item (2) do not include the borrowings outstanding in the Special Account for Local Allocation Tax (approx. 33 trillion yen), of which the redemption funds are burdens on local governments. (Note 7) The national government bonds in item (4) include ordinary government bonds, government compensation bonds and government bonds converted, and the borrowings, etc., include government subscription bonds, etc.

6

5. International Comparison of Fiscal Conditions International Comparison of General Government Fiscal Balance to GDP In the second half of the 1990s, Japan continued to run significant fiscal deficits while most of the major advanced countries improved their fiscal balance. Although at the beginning of the first decade of the 21st century Japan’s fiscal balance showed a tendency to improve, it was worsened as in other major countries from the autumn of 2008 due to the effects of the Lehman Shock. In the 2010s, while other major advanced countries once again reduced fiscal deficits, Japan continued to suffer a huge deficit. (%) 5.0

0.0

Germany Canada Italy France

▲ 5.0

U.K. U.S. Japan

▲ 10.0

▲ 15.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(CY) (As a percentage of GDP） CY

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Japan

▲ 8.2

▲ 8.1

▲ 6.3

▲ 7.6

▲ 7.8

▲ 6.4

▲ 5.0

▲ 3.1

▲ 2.6

▲ 3.1

▲ 8.9

▲ 8.3

▲ 8.6

▲ 8.2

▲ 8.4

▲ 7.4

U.S.

▲ 1.4

▲ 0.7

▲ 2.9

▲ 6.3

▲ 7.3

▲ 6.7

▲ 5.5

▲ 4.5

▲ 5.0

▲ 8.4 ▲ 13.7 ▲ 12.6 ▲ 11.2

▲9.6

▲ 6.5

▲ 6.0

0.9

5.8

0.4

▲ 2.2

▲ 3.5

▲ 3.5

▲ 3.4

▲ 2.9

▲ 3.0

▲ 5.1 ▲ 11.2 ▲ 10.0

▲ 7.9

▲ 6.3

▲ 5.9

▲ 5.3

Germany

▲ 1.6

1.1

▲ 3.1

▲ 3.8

▲ 4.1

▲ 3.8

▲ 3.3

▲ 1.7

0.2

▲ 0.1

▲ 3.1

▲ 4.2

▲ 0.8

0.1

0.0

▲ 0.2

France

▲ 1.8

▲ 1.5

▲ 1.7

▲ 3.3

▲ 4.1

▲ 3.6

▲ 3.0

▲ 2.4

▲ 2.7

▲ 3.3

▲ 7.5

▲ 7.0

▲ 5.2

▲ 4.9

▲ 4.3

▲ 3.8

Italy

▲ 2.0

▲ 0.9

▲ 3.2

▲ 3.2

▲ 3.6

▲ 3.6

▲ 4.5

▲ 3.4

▲ 1.6

▲ 2.7

▲ 5.4

▲ 4.4

▲ 3.6

▲ 2.9

▲ 2.8

▲ 2.7

1.8

2.9

0.7

0.0

0.1

1.0

1.7

1.8

1.5

▲ 0.3

▲ 4.5

▲ 4.9

▲ 3.7

▲ 3.4

▲ 3.0

▲ 2.1

U.K.

Canada

(Source) Based on the data included in “Economic Outlook 95” issued by the OECD in May 2014, and not reflecting the data for the budget for FY2014 (Note 1) Figures represent the general government-based data (including the central/local governments and the social security funds), except for Japan and the U.S. where the figures of the social security funds are excluded. (Note 2) Figures for Japan are adjusted to exclude special factors.

7

International Comparison of General Government Gross Debt to GDP In terms of the ratio of general government debt to GDP, some major advanced countries were steadily implementing fiscal consolidation in the late 1990s. However, Japan’s gross debt has rapidly worsened to reach the worst level among major advanced countries. (%) 240 Japan

210

180

150

Italy

120 France U.S. U.K. Canada

90

Germany

60

30

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(CY) (As a percentage of GDP） CY

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Japan

127.9

136.1

144.4

153.5

158.3

166.3

169.5

166.8

162.4

171.1

188.7

193.3

209.5

216.5

224.6

229.6

U.S.

58.6

52.7

52.7

55.1

58.3

65.2

64.6

63.4

63.8

72.6

85.8

94.6

98.8

102.1

104.3

106.2

U.K.

47.9

45.8

41.0

41.7

42.0

44.2

46.4

46.0

46.9

57.3

72.1

81.7

97.1

101.6

99.3

101.7

Germany

61.8

60.8

60.1

62.5

65.9

69.3

71.8

69.8

65.6

69.9

77.5

86.2

85.8

88.5

85.9

83.9

France

69.0

67.8

67.1

70.7

75.2

77.2

79.0

73.9

73.0

79.3

91.4

95.7

99.3

109.3

112.6

115.1

Italy

125.7

120.8

120.1

118.8

116.3

116.8

119.4

121.2

116.5

118.9

132.4

131.1

124.0

142.2

145.5

147.2

Canada

92.2

84.2

85.7

84.8

80.3

76.5

75.8

74.9

70.4

74.7

87.4

89.5

93.6

96.1

93.6

94.2

(Source) Based on the data included in “Economic Outlook 95” issued by the OECD in May 2014, and not reflecting the data for the budget for FY2014 (Note) Figures represent the general government-based data (including the central/local governments and the social security funds).

8

International Comparison of General Government Net Debt to GDP Net debt means government’s gross debt less government-owned financial assets (pension reserve consisting of insurance contributions paid by the people, etc.). Japan’s net debt also stands at the extremely severe level among major advanced countries. ※ When comparing net debt data, it is necessary to keep in mind that most government-owned financial assets are reserve funds that would cover social security benefits in the future and that it is impossible to immediately draw down these assets for redeeming the current debts or covering interest payment. (%) 150 Japan

125 Italy

100

U.S. U.K.

75

France

50

Germany Canada

25

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(CY) (As a percentage of GDP） CY

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Japan

52.4

58.8

65.5

74.5

77.6

82.4

82.2

81.0

80.5

95.3

106.2

113.1

127.3

129.5

137.5

142.5

U.S.

38.9

34.2

33.5

36.1

39.5

46.7

46.1

44.6

44.3

50.3

61.9

69.5

76.1

80.0

81.2

83.8

U.K.

28.3

23.9

20.5

21.4

21.6

23.6

24.6

25.1

26.2

31.0

43.0

52.5

66.5

66.1

65.4

67.7

Germany

34.6

33.9

36.2

40.4

43.4

47.5

49.7

47.9

42.6

44.6

49.0

49.5

50.5

50.5

49.1

47.8

France

36.1

37.4

39.7

44.4

46.5

47.5

45.4

39.3

35.7

45.9

52.2

57.5

62.3

70.3

73.6

76.0

Italy

100.5

94.9

95.8

95.2

92.3

92.0

93.3

94.2

90.8

93.6

104.8

103.5

97.8

113.2

116.5

118.2

Canada

58.1

49.4

47.8

48.5

43.2

39.0

34.2

29.8

27.0

28.8

34.6

37.4

42.5

43.6

40.4

40.9

(Source) Based on the data included in “Economic Outlook 95” issued by the OECD in May 2014, and not reflecting the data for the budget for FY2014 (Note) Figures represent the general government-based data (including the central/local governments and the social security funds).

9

（Reference） Assets and Liabilities of General Government （As of the end of FY2012）

Assets (545 trillion yen) [115.3％ to GDP]

Liabilities (1,142 trillion yen) [241.6％ to GDP] Social security funds (11 trillion yen)

Local governments (191 trillion yen)

Net Debt （597 trillion yen ） [126.3％ to GDP] （financial liabilities － financial assets）

Government Bonds （694 trillion yen ） Social security funds (211 trillion yen) Local governments (73 trillion yen) Borrowings (53 trillion yen) Central government (247 trillion yen)

Financing Bills (162 trillion yen) Other debt (32 trillion yen)

（Source） Cabinet Office “National Accounting”（January 2014） （Note）Gross debt = Long-term debt of central and local governments (932 trillion yen, as of the end of FY2012) + financing bills + liabilities of incorporated administrative agencies, etc.

MEMO

10

6. Factors for Increase in Government Bonds Outstanding Taking a look at the accumulation of government bonds outstanding from FY1990, when Japan was able to manage its public finance without issuance of special deficit-financing bonds, in the 1990s, expenditure growth was mainly attributable to the increase in public works-related expenditures. In contrast, expenditures have been recently growing mainly due to increased social security-related expenditures resulting from the aging of Japanese society and Local Allocation Tax Grants, etc. Government revenues have been shrinking mainly because tax revenues are falling due to the economic downturn and tax cuts. Increase in Government Bonds Outstanding from FY1990 to FY2014: around 603 trillion yen

Contribution of expenditure: around 335 trillion yen （trillion yen） 35.0 30.0

Social Security (+ around ¥ 210 trillion)

25.0

Local Allocation Tax Grants, etc. (+ around ¥ 78 trillion)

20.0

17.2

16.8

15.0

17.7

17.8

15.5 4.2

10.0

3.1 1.9

5.0

5.8

0.0

0.0

▲ 5.0

3.6

2.1

6.7 1.3 6.3 0.7 2.7 0.5 2.3 0.5 0.1 0.5 ▲ 0.9 ▲ 0.7 ▲ 1.3 ▲ 0.4 ▲ 0.5 ▲ 0.4

5.4 1.1 0.8

3.9 4.1 1.7

7.5

6.2

7.8

8.2

8.2

1.6 3.2

9.1

11.1

9.1

6.1 6.0

5.0

1.0 1.2

2.2 1.1

2.4

2.2

3.9

5.9

4.9

3.9 0.2

19.0

1.4 8.8

1.3 5.4

7.0

1.0

9.7 1.4 4.1

0.8 3.3

0.1 ▲ 3.2 ▲ 2.8 ▲ 4.0

8.2 0.3 1.3

4.1

5.1

6.9

5.6

1.8 0.2 ▲ 0.5 ▲ 1.2 ▲ 1.2 ▲ 1.2

▲ 3.5 ▲ 5.9 ▲ 4.8

5.4 1.6

4.2 ▲ 1.4 ▲ 1.0

Other expenditures

Public Works (+ around ¥ 59 trillion)

▲ 10.0 90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14 (FY)

Effect of receipt decline: about 146 trillion yen

(trillion yen) 35.0

※ ・ Approx. 57 trillion yen: reduction due to tax reform ・ Approx. 107 trillion yen: including the accumulated difference in income tax revenue from interest/dividends/land and stock transfers between FY1990 and each fiscal year

30.0 25.0 20.0

Tax Revenue (+ around ¥ 197 trillion)

15.0 10.0

15.0 11.9

5.0 0.0

0.0

0.1 ▲ 1.1

3.4 ▲ 0.6

3.5 ▲ 0.4

7.4

5.7

4.9

5.0

4.1

▲ 1.0

▲ 0.6

▲ 0.5

▲ 0.3

▲ 1.8

9.1

▲ 1.3

7.1

▲ 1.4

12.3

9.0

▲ 2.0

▲ 3.5

▲ 0.4

11.5

10.8

▲ 0.4

8.5

8.5

▲ 0.6

▲ 1.4

13.3

12.3

11.5

9.4

6.8

6.1

▲ 2.2 ▲ 8.9

▲ 5.0

▲ 1.5

▲ 2.0

▲ 1.6

12

13

14 (FY)

▲ 4.9

▲ 5.4

▲ 7.6

Non-tax Revenue

▲ 10.0 90

91

92

93

94

95

96

97

98

The portion marked with “ ” alone accounts for about 70% of the increase in government bonds outstanding.

99

00

01

02

03

04

05

06

07

08

09

10

11

Impact from balance gap in FY1990: around 68 trillion yen Other factors (long-term debt transferred from Japan National Railway, etc.): around 54 trillion yen

(Note 1) FY1990-FY2013: Settlement, FY2014: Budget. (Note 2) Reconstruction Bonds to secure financial resources of measures implemented from FY2011 to FY2015 for reconstruction from the Great East Japan Earthquake is excluded from Government Bonds Outstanding above. (Reconstruction bonds outstanding is expected at 11.4 trillion yen at the end of FY2014.) Accordingly, expenses financed by the issuance of Reconstruction Bonds in FY2011 (7.6 trillion yen) are excluded. (Note 3) As for the Local Allocation Tax Grants, those based on the legal rates of major 5 national tax revenues are excluded from both sides of expenditure and revenue as they offset from a central government’s point of view, and the others are counted as an expenditure increase.

11

Increase in Social Security Expenditures and Decrease in Tax Revenues (Unit: trillion yen) 【FY1990】 * Dependence on special deficit-financing bond issues ended Revenues 66.2

Construction bonds

Tax revenues 58.0

5.6 Non-tax revenues

2.6 Expenditures 66.2

Social security 11.6 （17.5％）

+29.6

Local allocation tax grants

15.3

+1.7

+18.9

Social security 30.5 （31.8％）

Expenditures 95.9

Revenues 95.9

National debt service 14.3

Others 25.1

+9.0

Local allocation tax grants

National debt service 23.3

Others 26.0

16.1

Special deficitfinancing bonds 35.2

Tax revenues 50.0 Non-tax revenues

Construction bonds

4.6

6.0

【FY2014】

Breakdown and Transition of the Tax Revenue (trillion yen)

(trillion yen)

40

35

70 60.159.8

54.454.1 30

51.051.952.1

53.9 49.4

26.0 26.7

18.4

19.5 19.0 19.2

13.7

12.112.4

50.0

11.4 10.8 11.7 10.3 9.3

50

47.0

45.6

44.3

42.843.9 41.5 38.7

40

17.8

15.4

14.513.5 13.7

Corporate Tax

0

18.8 17.0

10

5

47.2

51.0

Income Tax

16.6

15

49.149.1

47.9 43.843.3

20.4

20

50.7

23.223.7

25

60

Total Revenues

10.1 10.4 9.8 9.8

14.8

14.7 13.9 11.4

15.6 13.3

14.9

16.115.0

14.1 14.7

9.8 10.1

12.9 13.0

Consumption Tax

15.5 15.3 30

10.4 10.0 9.8 10.0 10.2

10.6 9.5 9.710.0 10.5 10.3 10.0

5.6 5.6 5.8 6.1 4.6 5.0 5.2

13.5 14.0

9.0 9.4 9.8

10.8

14.8

10.5

20 10.0

10

6.4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(FY)

（Note） FY1990 - FY2013: Settlement, FY2014: Budget

12

0

7. Aging Population and Increase in Social Security Benefits Although the total cost for social security benefits has been rising due to the increase of the elderly population, the revenues from social security contributions have remained flat recently because the compensation of employees grows at a sluggish pace under the deflationary situation. As a result, the gap between the cost and the contributions has been expanding which is financed by the public expenditure with the issuance of special deficit-financing bonds, etc. This means that the burdens are eventually shifted to future generations.

(trillion yen)

107.5

Social Security Benefits

100

Fiscal Resource ¥107.0 trillion ＋ Asset Income Assets Income, etc.

43.5

Long-term Care, Welfare, etc. 22.2 (of which, Longterm Care 9.5)

Local Taxes, etc. 11.9

National Treasury 31.1

80

60

Benefits ¥115.2 trillion

Revenues of Tax and Government Bonds 16.2

Medical Care 37.0

60.1

47.2 40

39.5 Contributions 64.1

Social Insurance Contribution

20

0

Pension 56.0

FY2014

FY2014

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (FY)

(Source) National Institute of Population and Social Security Research “The cost of Social Security Benefits”, FY2014: Ministry of Health, Labour and Welfare (initial budget)

Aging Population Population (ten thousand)

（Current）

Peak of the population of aged 15-64 （1995）

12,660

12,000

Peak of the population of aged 65 and over （2042）

40.4

1,583 （50 years ago） 1965 Aged 14 and under

9,828

10,000

35

36.1

（50 years later） 2065

30 8,136

26.8

2,517

（％）

40

8,000

735 25 8,717

6,000

7,682 20

Aged 15-64

6,693

14.6

4,113 15

4,000 Proportion of population aged 65 and over

10 3,868

2,000

6.3

0 1950

Aged 65 and over 618 1960 1970 1980 1990 2000

3,287 5

3,395

0 2010

2020

2030

2040

2050

2060

（Sources） Ministry of Internal Affairs and Communication “National Census” and “Population Projection”, National Institute of Population and Social Security Research, “Japan’s Demographic Composition in the Future (estimation as of January 2012)”, Ministry of Health, Labor and Welfare “Vital Statistics”

13

8. Government Revenues and Expenditures in OECD Member Countries From FY1995 to FY2011, government expenditures have increased due to the increase in social security expenditures, whereas the tax revenues have decreased and the conditions of fiscal revenues and expenditures have worsened. Expenditures not relating to social security have dropped to the lowest level among the OECD member countries. General Government Total Expenditures (as a percentage of GDP) 1995 2011 0

20

40

60

80

0 1Sweden 2Finland 3Denmark 4Netherlands 5Austria 6Hungary 7Germany 8France 9Czech Republic 10Israel 11Italy 12Belgium 13Norway 14Slovak Republic 15Greece 16Spain 17United Kingdom 18Portugal 19Estonia +6.2 20Ireland 21Luxembourg 22Japan 23United States 24Korea

64.9 61.5 59.3 56.4 56.3 55.8 54.9 54.4 53.0 52.6 52.2 52.1 50.9 48.6 46.2 44.4 43.2 41.9 41.3 41.1 39.7 36.1 35.7 20.4

General Government Social Security Expenditures (as a percentage of GDP) 1995 2011 0

20

0

40

20

20 33.6

40

60

80 1Denmark 2France 3Finland 4Belgium 5Greece 6Sweden 7Austria 8Netherlands 9Hungary 10Italy 11Portugal 12United Kingdom 13Ireland 14Spain 15Germany 16Israel 17Norway 18Czech Republic 19Luxembourg 20Japan 21United States 22Slovak Republic 23Estonia 24Korea

57.7 55.9 55.3 53.5 51.8 51.5 50.8 50.1 50.1 49.9 49.3 47.9 47.1 45.9 45.0 44.6 43.9 43.2 42.9 42.3 39.6 38.2 37.7 30.2

General Government Expenditures not Relating to Social Security (as a percentage of GDP) *excluding interest payment costs

1995 40

0

20

1Denmark

32.9

1Sweden

32.1

2Finland

32.0

2France

32.1

3Denmark

31.7

3Finland

2011 40

0

20

40

1Czech Republic

23.4

1Hungary

2Israel

22.8

2Israel

28.0

3Slovak Republic

22.6

3Belgium

34.1 29.5

29.8

4Austria

28.9

4Austria

26.8

4Sweden

22.4

4Sweden

28.6

5France

27.9

5Sweden

26.4

5Netherlands

22.3

5Netherlands

6Germany

27.8

6Italy

25.5

6Finland

22.2

6Denmark

25.1

7Norway

27.4

7Belgium

24.4

7Germany

22.2

7Finland

24.5

8Belgium

26.5

8Germany

24.1

8Estonia

21.2

8France

24.4

9Netherlands

26.3

9Greece

23.1

9Hungary

20.4

9Portugal

23.8

10Hungary

25.8

10Netherlands

23.1

10Norway

20.4

10Czech Republic

23.6

11Italy

25.6

11United Kingdom

22.5

11Austria

19.8

11Spain

22.4

12France

19.6

12Estonia

21.3

13Denmark

19.6

13Ireland

27.0

+10.7

22.2

12United Kingdom

25.4

12Japan

21.5

13Luxembourg

24.9

13Portugal

20.1

14Spain

24.7

14Norway

19.2

14Spain

19.3

14Austria

19.5

15Ireland

24.2

15Ireland

19.1

15Portugal

19.1

15United Kingdom

19.3

16Greece

23.6

16Spain

18.7

16Belgium

19.0

16Luxembourg

18.2

17Slovak Republic

23.4

17Luxembourg

18.0

17Japan

18.9

17United States

17.9

18Czech Republic

22.4

18Hungary

17.8

18Luxembourg

18.8

18Slovak Republic

17.2

19Portugal

21.5

19Czech Republic

17.6

19United States

18.2

19Greece

16.7

20Israel

17.9

20Estonia

17.4

20United Kingdom

18.1

20Norway

16.7

21Estonia

17.9

21Slovak Republic

17.1

21Italy

17.2

21Italy

14.7

22Japan

17.0

22Israel

16.3

22Ireland

16.0

22Germany

13.6

23United States

16.9

23United States

15.5

23Greece

14.8

23Japan

-3.2

（Source）OECD “Stat Extracts National Accounts”, EU”Ｅurostat Government Finance Statistics” （Note1）Figures represent the general government-based data (including the central/local governments and the social security funds). （Note２）The total expenditures of the government include interest payment costs.

14

General Government Tax Revenue

General Government Fiscal Balance

(as a percentage of GDP) 1995 2011

(as a percentage of GDP)

0

20

40

0

60

20 46.7

1Denmark

47.7

40

-15.0

-10.0

-5.0

0.0

5.0

1Denmark

2New Zealand

34.3

2Sweden

3Sweden

33.0

3Norway

31.6

4Finland

31.9

4Iceland

31.5

5Israel

31.8

5New Zealand

36.7 34.4

2014

1995 60

3.8 3.2

-10.0

10.0

-5.0

0.0

5.0

10.0

15.0 10.7 1Norway

1Korea 5.6

2Norway

2Poland

2.5

3New Zealand

0.3

3Luxembourg

2.4

4Luxembourg

0.1

4Switzerland

5Estonia

0.1

5Korea

6Switzerland

0.1

6New Zealand

1.1

31.3

6Norway

31.1

6Finland

30.8

7Canada

29.9

7Belgium

29.2

8Belgium

29.5

8Italy

-2.2

7Ireland

-0.2

7Estonia

28.7

9Iceland

28.7

9United Kingdom

-2.5

8Australia

-0.2

8Germany

28.2

10Australia

27.8

10Austria

-2.9

9Denmark

-1.5

9Denmark

27.5

11Ireland

27.4

11France

-3.0

10Iceland

-1.5

10Sweden

27.4

12United Kingdom

27.0

12Israel

-2.0

11Iceland

27.4

13Italy

13Luxembourg

11Slovak Republic

26.6

-3.4

26.5

14Australia

12Czech Republic

14Luxembourg

12United States

-2.1

27.3

-4.1 -4.4

13Poland

-2.1

13Canada

-4.5

14Belgium

-2.1

14Belgium

-1.7

26.7

15Hungary

26.0

14Canada

26.5

16Austria

24.3

16Hungary

25.3

17Slovak Republic

23.7

17Netherlands

-5.2

15Canada

-2.2

15Finland

25.2

18Poland

23.7

18Portugal

-5.4

16Portugal

-2.5

16Greece

24.4

19France

22.7

19Ireland

-5.5

17France

-2.5

17Australia

24.1

20Netherlands

22.7

20Germany

18United Kingdom

-2.7

18Slovak Republic

24.0

21Estonia

22.1

21Slovenia

-5.7

19Netherlands

22.7

22Switzerland

-2.7

21.6

19Austria

22Germany

-5.9 -6.1

20Finland

-2.7

20Italy

-6.5

21Japan

-2.8

21Austria

-2.9

22Hungary

22.3

23Slovenia

21.6

23Greece

21.5

24Portugal

20.9

24Poland

21.0

25Czech Republic

20.4

25Estonia

-7.2

22Spain

20.5

26Spain

20.1

26Spain

-7.3

23Sweden

-3.8

23France

20.1

27United States

20.1

27Turkey

-7.4

24Italy

-4.0

24Portugal

19.7

28Greece

19.9

28Chile

-8.3

25Slovenia

-4.1

25Slovenia

19.6

29Switzerland

19.8

29Korea

30Korea

30Czech Republic

26Hungary

17.6

19.5

-8.7

17.5

31Japan

18.5

31United States

▲0.7

-4.7

26Ireland

-9.2

27Nwtherlands

-5.3

27United Kingdom

28Germany

-5.5

28Spain

29Greece

-6.0

29United States

17.3

32Chile

16.9

32Mexico

-9.5

14.7

33Turkey

16.8

33Japan

-9.5

12.7

34Mexico

16.5

34Slovak Republic -12.8

▲2.0

30Czech Republic

-7.4

30Japan

(Source) OECD “Revenue Statistics”, “National accounts”, “Economic Outlook95”,CAO“National Accounts” etc. (Note 1) The tax revenues are on a general government basis (Aggregation of the central government, local governments and social security funds). (Note 2) The fiscal revenues and expenditures are on a general government basis (aggregation of the central government, local governments and social security funds). However, social security funds are excluded for Japan, and the US’s fiscal revenues and expenditures. Also, Japan’s fiscal revenues and expenditures for FY2014 are the figures for one single year excluding special factors.

(Reference) Relationship between Social Security Expenditures and the Tax and Social Security Contributions Ratio in Major Advanced Countries In comparison with the OECD member countries, Japan’s social security expenditures remain moderate while the tax and social security contributions ratio remains low.

Government Social Security Expenditure (as percentage of GDP)

40.0

35.0 30.0

Finland

France

Denmark

Sweden Austria Italy Belgium Greece Slovenia Germany Netherlands Portugal Norway Ireland Spain New Zealand Luxembourg Poland Hungary Czech Republic Slovak Republic Iceland Estonia Israel United States New Zealand Canada Switzerland Japan

25.0 20.0 15.0 10.0

Korea

5.0 0.0 20.0

30.0

40.0

50.0

Ta x a nd Social Security Contributions Ratio (as percentage of GDP) (Source) Tax and Social Security Contributions Ratio: OECD “National Accounts”, “Revenue Statistics”, Cabinet Office “National Accounts” etc. Social Security Expenditure: OECD “Stat Extracts National Accounts”. (Note 1) The figures represent the general government-based data (including the central and local governments and the social security funds). (Note 2) Tax and Social Security Contributions Ratio: For other countries, the figures are actual for 2011. For Japan, the figure for FY2011 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual. (Note 3) Social Security Expenditure : For other countries, the figures for 2011 are actual. For Japan, the figure for FY2011 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual.

15

60.0

Ⅱ. Need for Fiscal Consolidation

Compared with other countries, the Japanese government debt has reached at the worst level. However, the households with a large amount of financial assets and the private companies with a surplus of funds enable the government to issue a large amount of new government bonds and refunding bonds for redemption at relatively low interest rates. However, financial assets of households are expected to grow at a sluggish pace due to aging population and the surplus of funds in corporate sector is expected to decrease in the continuing economic recovery. The smooth issuance of government bonds would become more difficult than before and eventually it may become difficult to finance a large amount of government debt in a sustainable manner. In addition, if current balance goes into red and this situation continues, part of domestic capital needs is to be financed by foreign capital. In that case, the activity of foreign investors would have considerable impacts on the market in terms of interest rate and the demand for JGBs. Under this situation, it is necessary for the government to decrease the government bonds outstanding while reducing the issuance of new government bonds in order to mitigate the risk accompanied with the increment of interest rates. Moreover, if the confidence in public finance is lost in the market and rapid increase in interest rate occurs, the soundness and creditworthiness of financial institutions, which are major holders of the government bonds, will be deteriorated and its adverse effects on financing by companies and households occur. These situations could have substantial negative impacts on people’s living. Fiscal System Council “Basic Concept towards Fiscal Consolidation (May 30, 2014)”

9. Problems of Fiscal Deficit Expansion of fiscal deficits (increase in the issuance of government bonds and debts outstanding Policy action becomes less flexible ⇒ The expenditure of national debt service (interest payments and redemption of the national debt) increases due to the accumulated government debt outstanding and thus the other expenditure items are forced to be constrained. Therefore, there is little fiscal space to address the important policy issues in a timely manner and the budget allocation loses its flexibility. ⇒ If this situation continues, the levels of government services, which are indispensable for people’s living such as social security, education, national defense, and infrastructure development, are to be decreased.

Inequality among generations ⇒ The current increase in government debt (especially in special deficit-financing bonds) means that the social security benefits of current recipients are mainly borne by future recipients (generations). Moreover, this could result in that future generations will have to pay more tax and contributions for receiving less administrative services due to the large amount of public debts and this situation will force future generations to reduce the level of their consumption activities.

Hampering the financing by private sector ⇒ Demand for funds in private companies and households increases during economic recovery. However, if the government becomes bloated by consuming large amount of funds through the issuance of special deficit-financing bonds, the financing by companies and households as well as efficient resource allocation through market mechanism are hampered and as a result, the economy becomes sluggish.

Increase in interest rates due to the deterioration of confidence in public finance ⇒ Interest rates rise drastically if confidence in public finance is lost due to the increase in government debt outstanding. ⇒ In this case, the soundness and creditworthiness of financial institutions, which have large amount of government bonds, deteriorates and this causes them not only to be reluctant to provide new loans but also to withdraw existing loans and financial system becomes unstable. As a result, not only financing by companies and households but also the world economy could negatively be affected. ⇒ If confidence in public finance is further deteriorated, interest rates increase and the government will have difficulty in financing.

17

10. Environment Surrounding the Government Bonds Although a large amount of the government bonds is issued every fiscal year and the outstanding of government bonds continues to increase, the level of interest rates remains relatively low. This situation makes it possible to issue a large amount of government bonds at low interest rate.

Trends of Interest Payments and Interest Rate

(trillion yen)

(trillion yen)

10％ 25

8％ 20

900

Interest rate weighted average (left scale) 7.4

6％ 15

7.6

7.4

7.1 7.2

7.4 7.5 7.6 7.5 7.4

780 744

7.2 6.8

6.5 6.3

6.2 6.1 6.1

Government bonds outstanding (right scale) 5.8 5.1

527 532

4.6 10.2 9.7

8.7 7.7

10.5

10.4

10.8

10.6

10.8

11.0

10.7

10.6

10.7 10.8 10.6 10.5

10.74.3

5.6 4.4

0.8

0％ 0

1.3

1.9

2.6

3.3

82 22 32 43 56 71

96

134 110 122

145 152 157

161

166 172 178

700

670

600

636

193

207

225

541 546

500

499

4.0

3.5

245 258

295

457

392

10.1

10.0 421 8.6

332

6.6

2％ 5

705

594

5.4

Interest payments (left scale)

4％ 10

800

368

9.4

2.7 3.1 2.3

2.0

7.8

1.7

7.3 7.0 7.0 7.4 7.6 7.7

1.5 1.4 1.4 1.4 1.4

7.9 8.1 8.0 8.1

1.4 1.3 1.2 1.2

400 300 200

1.2

100 0

15

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY) (Note 1) Interest Payments for FY1975-2013: Settlement; FY2014: Budget. (Note 2) Government bonds outstanding for FY1975-2013: Actual; FY2014: Initial budget. (Note 3) Government Bonds Outstanding includes reconstruction bonds issued (FY2011: in General Account, after FY2012: in Special Account for Reconstruction from the Great East Japan Earthquake) as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 9.0 trillion yen and FY2014: 11.4 trillion yen) and Pension-related Special Deficit-Financing Bonds as a source of funds to achieve the targeted national contribution to one-half of basic pension (FY2012: 2.6 trillion yen, FY2013: 5.2 trillion yen and FY2014: 4.9 trillion yen).

Trends of the General Government Debt and Households Financial Assets Financial assets of households, which have been supporting the issuance of the government bonds so far, grow at a sluggish pace because of the decreasing households saving ratio caused by the progressing aging population, etc. On the other hand, the general government gross debt is increasing at the pace which exceeds the pace of increase in the financial assets of household. Under the situation where the outstanding of government bonds continues to increase, the smooth issuance of the government bonds in the market might be difficult if the confidence in the public finance is lost. (trillion yen) 2,000

(%) 20

Households Gross Financial Assets 1,630

1,500

15

1,262 1,158

1,000

10

General Government Gross Debt Households Net Financial Assets

500

5

Households Saving Ratio (right scale) 0

0 90 1990

95 1995

00 2000

05 2005

10 2010

(Note) General Government debt and households financial assets: as of the end of fiscal year (Source) Bank of Japan “Japan's Flow of Funds Accounts” (March 2014), Cabinet Office “National Accounting”

18

(FY)

The surplus of household finances has been lowering in the long term due to the decrease in their saving ratio, etc. On the other hand, in the overseas sector, the balance on goods and services is in the red because of the rapid increase in the value of imports of crude oil, etc. If the deficit of balance on goods and services exceeds the surplus of income balance and the balance of current account goes into red, socalled “twin deficits” occur under the situation where the budget deficit continues.

Trend in Current Balance (trillion yen)

40

Primary income Secondary income

Goods Current account

Services

30

20

10 0.8

0

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

▲ 20

1996

▲ 10

(FY)

(Source) Ministry of Finance “Balance of Payments”

Trend in Financial Surplus or Deficit by Sector (ratio to nominal GDP)

(Financial surplus）

10.0

Private Nonfinancial Corporations

5.0

5.0

4.3

Households 0.0

▲ 0.0 Overseas General Government

▲ 5.0

▲ 7.5

(Financial deficit）

▲ 10.0 80

82

84

86

88

90

92

94

96

98

00

02

(Note) Figures for each fiscal year are adjusted by special factors. (Source) Bank of Japan “Japan's Flow of Funds Accounts” (March 2014), Cabinet Office “National Accounting”

19

04

06

08

10

12 13 (FY)

At present, the Japanese government bonds are mainly financed domestically. However foreign investors have relatively large presence in the secondary market of the JGB because they buy and sell the JGB actively.

Breakdown of National Bond Holders of Each Country

＜Japan＞ (March 2014) General government (excluding public pension) Households Others 19,657 21,033 14,277 2.0% 1.4% 2.1% Fiscal Loan Fund Pension funds 604 33,638 0.1% 3.4% Foreign investors Bank of Japan 84,014 Public pension 201,061 8.4% 66,917 20.1% 6.7% Life insurance and property and casualty insurance companies Banks 193,095 363,858 19.3% 36.5%

(unit: billion yen)

＜U.S.＞

＜U.K.＞

＜Germany＞

(March 2014)

(December 2013)

(December 2013)

Foreign Domestic Investors Investors 47% 53%

Foreign Domestic Investors Investors 30% 70%

Foreign Domestic Investors Investors 39% 61%

Total: 12,591 billion dollars

Total: 1,421 billion ponds

Total: 1,819 billion euros

＜France＞

＜Italy＞

＜Greece＞

(December 2013)

(March 2014)

(December 2013)

Foreign Domestic Investors Investors 40% 60%

Foreign Domestic Investors Investors 37% 63%

Foreign Domestic Investors Investors 42% 58%

Total: 5,302 billion euros

Total: 1,781 billion euros

Total: 74 billion euros

Total: 998,153 billion yen

(Note) Japan includes Fiscal Investment and Loan Program bonds and Treasury Bills. U.S. excludes Government Account Series. Germany and Italy include local government bonds, etc.. France includes local government bonds, corporate bonds, etc.. (Source) Japan：Bank of Japan, “The Flow of Funds Accounts”. U.S.：Federal Reserve Board, “Flow of Funds Accounts of the United States”, U.K.： Office for National Statistics, “United Kingdom Economic Accounts”. Germany： Deutsche Bundesbank, “Deutsche Bundesbank Monthly Report”. France： Banque de France, ”Financial Accounts”. Italy： Banca d’Italia, “Supplements to the Statistical Bulletin”. Greece： Bank of Greece, “Financial Accounts”.

The Presence of Foreign Investors in Government Bond Market ① The investment share of the foreigners in government bond secondary market (futures)

② The investment share of the foreigners in secondary government bond market (actuals)

③ The holding ratio of the foreigners (stock)

(Note) Quarterly Data, including Treasury-Bill. ②: Data excluding the share of the bond dealers (Source) Bank of Japan, Japan Securities Dealers Association, Tokyo Stock Exchange

20

11. Fiscal Consolidation Measures Taken by Countries Immersed in Public Finance Crises and Its Impact on the Public After the participation in the euro in 2001, although Greece achieved high economic growth, current deficit increased and demand for the Greek government bonds by foreign investors also increased. Under the situation where the Greek government was able to obtain financing from the market by issuing its bonds, fiscal deficit and public debt increased. The deceptive statistics of public finance was uncovered in Greece and the Greek public finance lost its confidence in the market and the interest rate of the Greek government bonds increased. As a result of this, the Greek government had difficulties in obtaining financing from the market. The impact spread to other European countries where the public finance had already deteriorated and this developed into so-called “European debt crisis”.

Occurrence of the crisis in Greece ◆ General government fiscal deficit and public debt increased after participating in the euro in 2001. Real economic growth

Ratio of government bonds holdings by foreigners

The interest rate Current balance of the government (as percentage of bonds GDP)

Fiscal balance (as percentage of GDP)

Public debt (as percentage of GDP)

3.4% (1998)

33.7% (2000)

8% level (1998)

▲3.0% (1998)

▲3.7% (2000)

103.4% (2000)

5.5% (2006)

71.7% (2009)

4% level (2009)

▲11.2% (2009)

▲15.7% (2009)

129.7% (2009)

◆ The deceptive statistics of public finance was uncovered (October, 2009) and the Greek public finance lost its confidence in the market. – Downward adjustment of the actual and projection of its fiscal deficit. ◆ The rating of the Greek government bonds was downgraded and the interest rates rose. – Rapid increase in interest rate from 4% level as of October 2009 to high 8% due to the successive downgrade of the government bonds.

Occurrence of the public finance crisis The Greek government requested for financial support due to the difficulties in obtaining financing from the market. (Apr. 2010) ◆The first financial support to Greece (May 2010)

Occurrence of the financial crisis Top four Greek banks were immersed in management difficulties and faced to need for the government support in 2011 – The interest rate of the Greek government bonds further increased to high 34% at the end of 2011 and the loss of the financial institutions expanded. ◆ The second financial support to Greece (March 2012) – The interest rate of the government bonds increased to 37.10% on 2nd Mar. 2012. Spread to other European countries

Develop into the European debt crisis ◆In other European countries such as Portugal, Spain and Italy, etc. where the fiscal situations had already deteriorated due to the effects of the Lehman Shock, it occurred that the rating of their government bonds were downgraded and their interest rates rose. Fiscal balance (as percentage of GDP) Public debt (as percentage of GDP) (%)

2

(%) 120

0

110 100 90 80 70 60 50 40 30

▲2 ▲4

Italy

▲6

France

▲8 Spain Portugal

▲ 10 ▲ 12 2007

2008

2009

2010

(CY)

Italy Portugal France Spain

2007

2008

2009

2010 (CY)

Occurrence of the ◆Due to the difficulties in obtaining financing from the market, Portugal (Apr. public finance crisis 2011) and Spain (Jun. 2012) requested for financial support to EU and IMF Occurrence of the financial crisis

etc. ◆Sharp fall in Greek government bond prices deteriorated the management of the large European financial institutions in Germany and France in 2011. As a result, some of which faced to need for the government support. 21

Basic Structure of the European Debt Crisis In the European debt crisis, rising interest rate of government bonds (falling government bond prices) associated with the loss of confidence in public finance caused the occurrence of the public finance crisis. In addition, the financial crisis triggered by the public finance crisis simultaneously happened and thus the risk, which could not be addressed by the country alone, became obvious. ■Basic structure of the European debt crisis Fiscal deficit and public debt increased

■ Rising interest rate of government bonds (After the time when Greece requested for the support (2010.4.23))

lost its confidence in the market

Greece

Ireland

Italy

Portugal

Spain

8.66%

4.78%

4.01%

4.97%

3.98%

37.10% (2012.3.2)

14.08% (2011.7.18)

7.26% (2011.11.25)

17.39% (2012.1.30)

7.62% (2012.7.24)

Rising interest rate of government bonds / Falling government bond prices triggered by the public finance crisis

Occurrence of the public finance crisis The government Difficulties in obtaining financing from the market

Occurrence of the financial crisis Financial institutions Deteriorated financial conditions and immersed in management difficulties

In 2011, top four Greek banks (National Bank of Greece, Alpha Bank, Eurobank EFG, and Piraeus Bank) failed due to the loss caused by the falling prices of owned government bonds. In 2012, the Greek government obtained the financial support from the Eurozone, etc. and conducted the capital injection which amounted to EUR 27.5 billion in total into these four banks.

It became difficult to bail out the failing or failed financial institutions by public funds

In October 2011, the Dexia, a large financial institution in Belgium and France, came to have difficulties in financing mainly due to the loss of the falling prices of its owned Greek government bonds. The Belgian, French and Luxembourgish governments therefore guaranteed EUR 90 billion for liquidity support.

Implementation of the support by the cooperation of IMF, EU and ECB

Shutoff of the spillover of the risk In 2011, BNP Paribas in France and Commerzbank in Germany significantly decreased their profits compared with 2010, mainly due to the loss of the falling prices of their owned Greek government bonds. The ratings of these banks were also downgraded partly because of their high exposures to the GIIPS countries.

Prevent the further “loss of confidence in public finance, amplification of financial instability and deterioration in economic situation”

Impact on the Public Since the economic situations worsened and the unemployment rate increased, demonstrations and strikes were frequently occurred by those who were frustrated with the tax hike and cut in pensions associated with the implementations of fiscal consolidation measures. The domestic political situations eventually became unstable. Deterioration in economic situations

Greece ▲7.0%

Italy ▲2.4%

（Real GDP growth(2012))

Portugal ▲3.2%

Spain ▲1.6%

Occurrence of the financial crisis

Increase in the unemployment rate

Greece 24.5% （55.3%）

(Unemployment rate less than 25 years old(2012))

Italy 10.7% （35.3%）

Portugal 15.8% （37.9%）

Spain 24.8% （52.9%）

 In Greece, for example, financial institutions failed one after another because of the increase in nonperforming loans associated with the deterioration in economic situations as well as the loss caused by the falling prices of their owned government bonds associated with the rise in interest rates. Implementation of fiscal consolidation measures Countries supported by EU and IMF implemented the painful severe fiscal consolidation measures to the nation.

Greece

Portugal

・Fiscal target: General government fiscal deficit (percent of GDP): 13.6% (CY2009) → 2.6% (CY2014) ・Cut in labor cost for government employees (the elimination of bonuses, the reduction of 150,000 government employees by CY2015, etc.) ・Cut in pensions (the elimination of bonuses, the cut of pensions, which exceeds EUR 1,400 per month, by 8% on average, the raise of a statutory retirement age to 65 years old, etc.) ・Increase in VAT rate from 21% to 23%

・Fiscal target: General government fiscal deficit (percent of GDP): 9.1% (CY2010) → 3.0% (CY2013) ・Cut in labor costs for government employees (the wage cut by 5% on average, the freeze of nominal wages by 2013, etc) ・Cut in pensions (the cut of pensions for those who receive above EUR 1,500 per month and the freeze of pensions) ・Reduction of expenditures for education and largescale infrastructures, etc. ・Review of VAT exemptions and the preferential taxation system, etc.

22

(Reference) Fiscal Situations of European Countries Fiscal Balance to GDP

(%) 4.0

(%) 240

General Government Gross Debt to GDP

210 0.0 180

Spain

Japan

Portugal

150

▲ 4.0

120

Greece

▲ 8.0

90

Japan

Portugal

Greece

Spain

60 ▲ 12.0 30

0

▲ 16.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(CY)

(CY)

(Source) OECD “Economic Outlook 95” (Note 1) The fiscal revenues and expenditures, and outstanding debts are on a general government basis (aggregation of the central government, local governments and social security funds). However, social security funds are excluded for Japan’s fiscal revenues and expenditures. (Note 2) Japan’s fiscal revenues and expenditures are the figures for one single year excluding special factors.

MEMO

23

12. Increase in Interest Rates Due to Loss of Confidence in Public Finance – the European Debt Crisis – Trend in the Rating of GIIPS Countries According to Moody’s Corporation （As of 2014.9.17） If the confidence in the public finance is decreased due to the increment of the government debt, the rating of the government bonds can be downgraded and this situation can be a trigger for the increase in the interest rates of the government bonds.

below investment grade

(Note) Greece and Italy had stable outlooks. Portugal and Spain had positive outlooks . (Reference) Ratings of government bonds assigned by other major rating agencies. According to S&P ratings: Greece: B (equivalent to B2), Italy and Spain: BBB (equivalent to Baa2), Portugal: BB (equivalent to Ba2) *Outlook: All countries: Stable According to Fitch ratings: Greece: B (equivalent to B2), Italy and Spain: BBB+ (equivalent to Baa1), Portugal: BB+ (equivalent to Ba1) . * Outlook: Portugal: Negative, and Other countries: Stable.

The Change in Interest Rate of Each Country in European Debt Crisis(Greece: right scale) Although the spread among European countries’ interest rate of their governments bonds had been converged before the Lehman Shock, under the situation where the confidence of the public finance is eroded in the market, the interest rates were drastically changed due to the impact by the political situations and the fiscal policies, etc. among the countries with deteriorated public finances and the balance of current account. March 2 2012 (%) (%) Japan U.S. Greece 37.10 8 40 July 24 2012 November 25 2011 Germany France Spain 7.62 Italy 7.26 Italy Spain 7 35 November 2011 Greece 6

June 12 2007 U.S. 5.29

5

June 19 2008 France 4.84 June 19 2008 Germany 4.68

2 1 0

June 13 2007 Japan 1.97

30 25

4 3

April 2013 Launched the coalition government in Italy

Change of government in Greece

June 2012 Repeat election in Greece

20 February 2013 General election in Italy

The Lehman Shock October 2009 Deceptive statistics was uncovered in Greece

15 10

April 23 2010 Greece requested for support (first)

February 8 2012 Greece requested for support (second)

5 June 25 2012 Spain requested for support

0

（Source） Bloomberg (Note) With regard to Greece’s government bonds, the new issue bonds, which had been exchanged since March 12, 2012, have been traded. This document adopts the interest rates of Greece’s government bonds which have been issued since March 12, 2012, and are going to be redeemed in 2023.

24

MEMO

25

Ⅲ. Measures toward Fiscal Consolidation

In order to successfully proceed with fiscal consolidation, a virtuous cycle of economic revitalization and fiscal consolidation is essential. In this regard, the government makes its utmost efforts to realize both sustainable growth and fiscal consolidation in line with the “Medium-term Fiscal Plan”. The government aims to achieve the following targets about the primary balance of national and local governments; 1. To halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010, 2. To achieve a primary surplus by FY2020, and 3. Thereafter, seeking to steadily reduce the public debt to GDP ratio

13. Clear Trajectory to Fiscal Consolidation Basic Framework for Fiscal Consolidation: Medium-term Fiscal Plan (Approved by the Cabinet on August 8, 2013)

I. Basic Understanding ○ The Government seeks to achieve nominal GDP growth of around 3% and real GDP growth of around 2% on average over the coming decade (from FY2013 to FY2022). The Government creates a virtuous cycle between sustainable economic growth led by private demand and fiscal consolidation.

II. Fiscal Consolidation Targets ○ The Government aims to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020, thereafter the Government will seek to steadily reduce the public debt to GDP ratio.

III. Achieving the Target for FY2015 ○ The Government aims to improve the primary balance of the General Account at least by approximately 4 trillion yen both in FY2014 and FY2015. ○ The Government will make its utmost efforts to keep the amount of newly issued National Government bonds below that of the preceding fiscal year for the FY2014 and FY2015 budgets.

IV. Achieving the Target for FY2020 ○ The Government will improve the primary balance of the General Account, just as is the case for efforts to be pursued until FY2015, and turn it into a surplus. ○ On the expenditure side, the Government will gradually reduce the primary expenditure to GDP ratio by controlling the primary expenditure to the extent possible through eliminating wasteful expenditure in each year’s budget, while increasing GDP through economic growth. On the revenue side, the Government will seek to expand tax revenues through economic growth. In the process of making these efforts, the Government will consider securing financial resources for social security spending that has been on the rise mainly due to population aging, through measures both on the expenditure and revenue sides, including any necessary reforms of the systems.

(Reference) Trends in Primary Balance of National and Local Governments to GDP 【SNA】 (as percentage of GDP)

4.0 2.2

2.0

1.3 0.9

0.0

2.6

Primary balance of Local Governments

2.3

2.1

0.5

0.1

0.1

▲ 0.8

0.1

0.0

▲ 0.6

▲ 1.1

▲ 2.0 ▲ 2.3

0.6

0.6

▲ 2.7

▲ 1.7

▲ 2.4

▲ 2.9

▲ 2.5

▲ 3.2 ▲ 3.9

▲ 2.9 ▲ 3.3 ▲ 3.6

▲ 6.0

▲ 5.9

Primary balance of National and Local Governments

0.5

0.3

0.6

0.6

0.6

▲ 1.7

▲ 4.5

▲ 4.2

▲ 4.3 ▲ 5.4 ▲ 4.7 ▲ 4.7

▲ 8.0

0.6

0.0

▲ 4.0 ▲ 5.2 ▲ 5.2

0.6

0.6

▲ 1.1

▲ 0.4 ▲ 0.4

▲ 1.2 ▲ 1.4 ▲ 1.4 ▲ 1.5 ▲ 1.9 ▲ 1.6 ▲ 1.8 ▲ 2.0 ▲ 2.1

0.6

0.4 0.8

▲ 0.7 ▲ 1.2

▲ 4.0

0.9

0.5 0.1

▲ 3.2

▲ 3.2

▲ 4.1

▲ 3.8

▲ 5.1

▲ 5.6 ▲ 5.6

▲ 6.6

▲ 6.3

▲ 6.6 ▲ 7.6

Primary balance of National Government

▲ 5.9

▲ 2.2

▲ 2.1

▲ 2.0

▲ 1.8

▲ 2.4 ▲ 2.8 ▲ 2.7 ▲ 2.5 ▲ 3.0 ▲ 3.6

▲ 5.4

▲ 6.2 ▲ 6.5 ▲ 6.7 ▲ 6.9

▲ 8.0

▲ 10.0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 (Source) FY1985-2012: Cabinet Office "Annual Report on National Accounts" (FY) FY2013-2020: Cabinet Office "Economic and Fiscal Projections for Medium to Long Term Analysis“(Economic revival case) (July 2014) (Note 1) The long-term debts of Japan National Railways and the cumulative debts of national forests are excluded for FY1998, the Fiscal Loan Fund of the special account for the fiscal investment and loan program (the special account for the Fiscal Loan Fund for 2006) transferred to the special account for the Government Debt Consolidation Fund or the general account are excluded for 2006, 2008, 2009, 2010 and 2011, the debts transferred from Japan Expressway Holding and Debt Repayment Agency to the general account are excluded for 2008, and the debts transferred from Japan Railway Construction, Transport and Technology Agency to the general account are excluded for 2011. (Note 2) Excluding the expenditures for the recovery and reconstruction measures from FY2011 to FY2020.

27

Summary of the Basic Policies for the Economic and Fiscal Management and Reform 2014 (Cabinet decision, June 24, 2014) Chapter 3: A virtuous cycle of economic revitalization and fiscal consolidation 1. Guiding principles in pursuing both economic revitalization and fiscal consolidation 〇It is essential to establish sustainable public finance and social security in the possible situation such as a rapid declining birthrate and aging population, a further progress in aging of baby-boom generation, a decline of the households saving ratio and a decrease in the current account surplus. The government aims at simultaneously achieving economic revitalization, fiscal consolidation and sustainable social security. （For achieving the fiscal consolidation target） 〇In order to achieve a primary surplus by FY2020, the government will advance the consideration of a concrete prospect without delay, while taking into account the compilation of the national budget for FY2015, etc. When the situation allows, the government will improve a fiscal balance as much as possible, while ensuring the progress of the economic revitalization. 〇Regarding the expenditure for social security which is increasing due to the aging population, etc., the government will steadily implement the measures for establishing the sustainable social security system, while aiming at the balance between the benefits and the contributions in the medium term. With regard to the other expenditures, the government will constrain them as much as possible through further prioritization and rationalization.

Chapter 4 : Guiding principles for compiling the national budget for FY2015 1. Principles in economic and fiscal management (2) Measures to be taken in light of medium- to long-term economic and fiscal prospects 〇FY2015 is the target year for achieving the goal of halving the primary deficit to GDP ratio from the ratio in FY2010. The government will aim to achieve this goal steadily while ensuring both an exit from deflation and economic revitalization, therefore the government will do its utmost in line with the Medium-term Fiscal Plan, as in the budget for FY2014 〇By the end of 2014, the government will decide whether or not to go ahead with the plan to raise the consumption tax rate to 10% scheduled for October 2015 after making a comprehensive assessment of the economic situation in accordance with the Supplementary Provision of the Comprehensive. Tax Reform Act. The Council on Economic and Fiscal Policy will conduct a necessary comprehensive examination of the economic situation, etc. 2. Guiding Principles in compiling the national budget for FY2015 〇Regarding the FY2015 budget’s expenditure influencing the primary balance, the government will further constrain the Non-social security expenditures as much as possible, compared with the preceding fiscal year. In addition, the government will review social security expenditures without exception and will further minimize those increase compared with the preceding fiscal year. 28

14. The Status of Achievement of the Fiscal Consolidation Target in Projections by Cabinet Office (July 2014) A primary deficit of the national and local governments to nominal GDP ratio is projected to be around 3.2 % in FY2015 and the fiscal consolidation target to halve the ratio in FY2010 being achieved. The gap between the projection (▲3.2%) and the target (▲3.3%) in FY2015 is about 0.7 trillion yen. The primary deficit to nominal GDP ratio in FY2020 is projected to be around 1.8 % (▲11.0 trillion yen), so in order to achieve a primary surplus by FY2020, additional measures for improving the fiscal balance are required.

【Results of Projections】 (%)

＜Primary Balance of the National and Local Governments (ratio to nominal GDP)＞ Target: Primary Surplus ■ ▲11.0 trillion yen

Target: To halve the primary deficit ▲3.3%

●

▲ 5.1 ■

“Economic Revival Case” “Reference Case” Fiscal Target for National and Local Government

(FY) (Note) Excluding the expenditures and fiscal resources for the recovery and reconstruction measures related to the 2011 Earthquake.

(%)

＜Nominal GDP＞

“Economic Revival Case” “Reference Case”

(FY)

※ Economic Scenarios and Basic Assumptions on Public Finance ○ Economic Scenarios ・ “Economic Revival Case” ：The average annual growth rate for the FY2013 - FY2022 period is approximately 3 % in nominal and 2 % in real terms. ○ Basic Assumptions on Public Finance ・ FY2015 : Based on the Medium-term Fiscal Plan (Aug. 8th, 2013), the Government aims to improve the primary balance of the General Account by approximately at least 4 trillion yen. ・ After FY2016 : Social-security-related expenditure increases according to demographic factor, etc. The other expenditures increase according to CPI. 29

15. Indicators used to set the Objectives of Fiscal Consolidation The stock indicators that show cumulative debts, and the flow indicators that show each year’s fiscal balance are used when setting the objectives of fiscal consolidation.

＜Stock Indicators＞ ○ Ratio of debt outstanding to GDP The ratio of debt outstanding to GDP is the indicator used to compare the debts incurred by the central and local governments to gross domestic product (GDP). Importance is attached to this indicator when promoting fiscal consolidation, as it indicates the size of debt piled up by the central and local governments in relation to the scale of the economy.

＜Flow Indicators (1)＞ ○ Primary Balance The Primary Balance (PB) is an indicator that shows to what extent the expenditure required to implement policy measures in a given timeframe is covered by tax revenues in the same timeframe. At present, the primary balance is in the red in Japan with expenditures for policy measures exceeding tax revenues (See Fig. A on the next page). When the primary balance is in equilibrium, the numerator and the denominator in the ratio of debt outstanding to GDP change as below.

Debt Outstanding GDP

When the primary balance is in equilibrium, the debt outstanding is increased by interest payment, which is calculated by multiplying debt outstanding by interest. Therefore, debt outstanding grows in proportion to the level of interest rates as long as the primary balance continues to be in equilibrium.

On the other hand, GDP increases or decreases in proportion to the economic growth rate.

This means that the change in the ratio of debt outstanding to GDP as a whole is affected by interest rates and the economic growth rate. These can be summarized as follows: When the primary balance is in equilibrium, ・ Ratio of debt outstanding to GDP rises if nominal interest rate exceeds nominal GDP growth rate ・ Ratio of debt outstanding to GDP remains constant if nominal interest rate is equal to nominal GDP growth rate ・ Ratio of debt outstanding to GDP decreases if nominal GDP growth rate exceeds nominal interest rate → The primary balance needs to maintain a certain level of surplus in order to lower the ratio of debt outstanding to GDP at a steady pace.

30

＜Flow Indicators (2)＞ ○ Fiscal Balance Even if primary balance is in equilibrium, the actual amount of debt outstanding will increase by interest payments. In order to stop this, we have to achieve equilibrium in fiscal balance including interest payments. Moreover, when fiscal balance is in equilibrium, the amount of new debts is equal to the amount of repayment of past debts (See Fig. C). For fiscal consolidation objective, primary balance equilibrium is used in Japan, Fiscal balance equilibrium is used in other countries. Figure A: Current Situation (Revenues)

(Expenditures) Redemption of the debt

Debt Fiscal Balance (deficit)

Tax revenues, etc.

Interest payments PB (deficit)

Expenditures for Policy Measures

Figure B: Primary Balance Equilibrium

Figure C: Fiscal Balance Equilibrium

(Revenues)

(Expenditures)

(Revenues)

(Expenditures)

Debt

Debt

Redemption of the debt

Redemption of the debt

Interest payments

Fiscal Balance (deficit)

Fiscal Balance (equilibrium) PB (equilibrium)

Tax revenues, etc.

Expenditures for Policy Measures

Tax revenues, etc.

Interest payments PB (surplus)

Expenditures for Policy Measures

※ Strictly speaking, we need to subtract interest income from revenues when calculating the primary balance, but this has been omitted to simplify calculation.

MEMO

31

16. International Trends toward Fiscal Consolidation At the G20 Toronto Summit (June, 2010), advanced economies committed the fiscal consolidation target in order to improve the deteriorated fiscal situations due to the Lehman Shock; however, compared with other countries’ targets, Japan’s fiscal consolidation target is less demanding.

Flow target Target year Commitment Advanced economies except Japan

Stock target Target year Commitment

CY2013

To halve the fiscal deficit

CY2016

Slower

Less demanding

Slower

FY2015

To halve the primary deficit

FY2020

Primary surplus

Japan

stabilize or reduce the government debt-to-GDP ratios

steadily reduce the outstanding of the public debt After FY2021 of national and local governments

【 The G-20 Toronto Summit (June 26-27, 2010) 】 ○ Declaration …, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. Recognizing the circumstances of Japan, we welcome the Japanese government’s fiscal consolidation plan announced recently with their growth strategy. Those with serious fiscal challenges need to accelerate the pace of consolidation. 【 The G-20 St. Petersburg Summit (September 5-6, 2013) 】 ○ Declaration Achieving a stronger and sustainable recovery, while ensuring fiscal sustainability in advanced economies remains critical. As agreed, all advanced economies have developed credible, ambitious, and country-specific medium-term fiscal strategies. These strategies will be implemented flexibly to take into account near-term economic conditions, so as to support economic growth and job creation, while putting debt as a share of GDP on a sustainable path. … ○ St. Petersburg Action Plan As agreed, all advanced economies have put forth strategies that are geared toward maintaining or lowering the debt-to-GDP ratio over the medium term. … Japan will seek to steadily reduce the public debt-to-GDP ratio after achieving a primary surplus by fiscal year 2020. … 32

17. Comparison in Targets for Fiscal Consolidation in Major Advanced Countries Major advanced countries set fiscal consolidation targets and ensure medium-term fiscal sustainability to improve the deteriorated fiscal situation due to the response to the depression and have been steadily proceeding with the fiscal consolidation since the G20 Toronto Summit.

Fiscal Balance to GDP(General Government)

(%)

2 0.0

0

Germany 2008

▲2

▲ 2.8 ▲ 4.2

▲4

▲ 5.4

▲6

▲ 7.5

▲8

France Germany

▲ 4.3

U.K.

▲ 5.9

U.S.

▲ 6.4

▲ 8.7

2009 2010 2011 2012 2013 2014 2015

Italy ▲ 0.1 ▲ 3.1 ▲ 4.2 ▲ 0.8

0.1

0.0 ▲ 0.2

0.2

Italy

▲ 2.7 ▲ 5.4 ▲ 4.4 ▲ 3.6 ▲ 2.9 ▲ 2.8 ▲ 2.7 ▲ 2.1

France

▲ 3.3 ▲ 7.5 ▲ 7.0 ▲ 5.2 ▲ 4.9 ▲ 4.3 ▲ 3.8 ▲ 3.1

U.K.

▲ 5.1 ▲11.2 ▲10.0 ▲ 7.9 ▲ 6.3 ▲ 5.9 ▲ 5.3 ▲ 4.1

U.S.

▲ 7.2 ▲12.8 ▲12.2 ▲10.7 ▲ 9.3 ▲ 6.4 ▲ 5.8 ▲ 4.6

Japan

▲ 1.9 ▲ 8.8 ▲ 8.3 ▲ 8.8 ▲ 8.7 ▲ 9.3 ▲ 8.4 ▲ 6.7

Japan

▲ 8.8

▲ 10

▲ 11.2

▲ 12

▲ 12.8

▲ 14

2008 2009 2010 2011 2012 2013 2014 2015 (CY) (Source) OECD “Economic Outlook 95” (Note) Japan: Projection starts after 2013, other countries: projection starts after 2014

Gross Debt to GDP(General Government)

(%)

250 232.5 230

216.5

Japan 2008

210 190 170

171.1 145.5

150 130 110

118.9

99.3

90

79.3 72.6 70 69.9 50

112.6 104.3

85.9

2009

2010

2011

2012

2013

2014

2015

Japan

171.1 188.7 193.3 209.5 216.5 224.6 229.6 232.5

Italy

118.9 132.4 131.1 124.0 142.2 145.5 147.2 147.4

Italy

France

France

79.3

91.4

95.7

99.3 109.3 112.6 115.1 116.1

U.S.

72.6

85.8

94.6

98.8 102.1 104.3 106.2 106.5

U.K.

57.3

72.1

81.7

97.1 101.6

99.3 101.7 103.1

Germany

69.9

77.5

86.2

85.8

85.9

U.S. U.K. Germany

57.3

2008 2009 2010 2011 2012 2013 2014 2015 (CY) (Source) OECD “Economic Outlook 95” (Note) Japan: Projection starts after 2013, other countries: projection starts after 2014

33

88.5

83.9

79.8

The Principles of Fiscal Management and the Fiscal Consolidation Targets The Principles of Fiscal Management (Law) Japan

U.K.

Germany

France

Italy

Public Finance Law (1947)  The government expenditures are financed by the revenues except for the government bonds and borrowings. Budget Responsibility and National Audit Act 2011 (2011)  The Treasury must prepare a document, to be known as the Charter for Budget Responsibility, relating to the formulation and implementation of fiscal policy and policy for the management of the National Debt.  The Charter (or the modified Charter) does not come into force until it has been approved by a resolution of the House of Commons. Basic Law (2009)  The budgets of the federal and local governments shall in principle be balanced without revenue from credits.  The structural deficit to GDP(Federal government) ⇒ Not exceed 0.35% from 2016 onwards Budgetary Principles Act (2013)  The structural deficit to GDP(General government) ⇒ Within 0.5% of GDP Constitution (2008)  The multiannual guidelines for public finance are defined by the law of the programme, and the guidelines are the part of the objective of balancing the government accounts. Organic Law Relative to the Programme and the Governance of Public Finance (2012)  The law of the programme of public finance fixes the objective in medium term of general government. Law of the Programme of Public Finances from 2012 to 2017 (2012)  Medium term fiscal target (General government) ⇒ To balance the structural balance by 2016  Public debt to GDP(General government) ⇒ To reduce the portion of the debt ratio above 60% at an average rate of 1/20 of the debt over the previous three years from 2018 onwards Constitution (2012)  General government entities, in accordance with European Union law, shall ensure balanced budgets and the sustainability of public debt. Provisions for the Application of the Balanced Budget Principle Pursuant to Article 81.6 of the Constitution (2012)  The value of the structural balance is used as the criteria for the balanced budget and the target is set in the Stability Programme.

The Fiscal Consolidation Targets, etc. (Fiscal Plan, etc.) Japan

U.S.

U.K.

Germany

France Italy

Medium-term Fiscal Plan (2013)  Primary balance (National and local governments) ⇒ ①To halve the primary deficit to GDP ratio by FY2015 from the ratio in FY2010 ②To achieve the primary surplus by FY2020  Public debt to GDP ratio (National and local governments) ⇒ Reducing steadily after FY2021  There is no concrete target in “Budget of the United States Government FY2015”. ※ In “Budget of the United States Government FY2014”, a total of 4 trillion dollars of financial deficit (Federal government) shall be reduced in 10 years. Charter for Budget Responsibility (2011)  Cyclically-adjusted current balance (Public sector) as a percentage of GDP ⇒ To be balanced by the end of the rolling, five-year forecast period  Public sector net debt as a percentage of GDP ⇒ To be falling at fixed date of 2015-16, ensuring the public finances are restored to a sustainable path German Stability Programme (2014)  Debt to GDP ratio (General government) ⇒ To reduce the portion of the debt ratio above 60% at an average rate of 1/20 of the debt over the previous three years  Debt to GDP ratio (Federal government) ⇒ ① less than 70% by the end of 2017, ② less than 60% within ten years France Stability Programme (2014 – 2017)  Government deficit to GDP ⇒ Not exceed 3% by 2015 Italy’s Stability Programme (2014)  To achieve the balanced budget in structural terms (General government)  Debt-to-GDP ratio (General government) ⇒ To reduce the portion of the debt ratio above 60% at an average rate of 1/20 of the debt over the previous three years

(Reference) The fiscal rule in EU  The objectives of fiscal consolidation in EU (Maastricht criteria)：①Deficit to GDP ratio (General government): Not exceed 3%、②Debt to GDP ratio (General government): Not exceed 60% (Treaty on the Functioning of the European Union)(1993)  Each participating Member State shall submit to the EU Commission a stability programme which presents the medium-term budgetary objective.(Stability and Growth Pact)(1997)  The budgetary position of the general government of a Contracting Party shall be balanced or in surplus which shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective with a lower limit of a structural deficit of 0.5% of GDP. These rules shall take effect in the national law of the Contracting Parties through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes. (Fiscal Compact)(2012)

34

(Reference) Views of International Organizations to Japan's Fiscal Policy

IMF “Japan-2014 Article IV Consultation Concluding Statement of the IMF Mission”(May 30, 2014)  Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline. Adoption of a concrete medium-term fiscal consolidation plan beyond 2015 would build confidence in the sustainability of public finances and allow more flexibility to respond to downside risks. Plans to lower the corporate tax rate have growth benefits, but should proceed in combination with measures to offset revenue losses and be consistent with plans to restore fiscal sustainability.  (…) the authorities may not achieve their G20 goal of halving the primary deficit by FY 2015 to 3.3 percent of GDP (and this target would slip out of reach with a corporate income tax rate cut or the introduction of multiple consumption tax rates).  A post-2015 fiscal consolidation plan is urgently needed and should include further revenue measures and entitlement reforms. Such a plan should be as growth friendly and equitable as possible and would allow more near-term flexibility to respond to downside risks. Options (see text table) include gradually increasing the consumption tax to at least 15 percent, broadening the personal income tax base, and taking measures to contain pension and health care spending.

OECD “Economic Outlook No.95” (May 6, 2014)  The top priority should be to produce a detailed and credible long-term plan of measures to consolidate public finances. The plan should include social security reforms to limit spending increases, particularly in the areas of health and long-term care, as well as revenue increases.  With gross public debt surpassing 230% of GDP, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by FY 2020 remains a top priority to sustain confidence in Japan’s public finances.  The consumption tax rate should be hiked further to 10% by 2015, as planned.  Sustained growth in the face of needed fiscal consolidation depends on a virtuous circle of rising prices, wages and corporate earnings. However, delaying fiscal consolidation could increase the risk of a run-up in long-term interest rates, which would have serious consequences for the financial sector, fiscal sustainability and output growth, and could have significant spillovers to the global economy. 35

Ⅳ. Aging Population and The Comprehensive Reform of Social Security and Tax With the rapid progress of aging population, social security benefits have been significantly increasing and their dependence on public funds has been growing. Special deficit-financing bonds have been issued to finance a part of increasing social security benefits, which means that the burden will eventually lie on the future generations, and this is the biggest factor for the fiscal deficit. In the early 2020s, the first baby-boomers will become 75 years old or over and the labor force population is going to reduce and this will result in that the total amount of the employee’s payment, which becomes a source for income tax and insurance contributions, is expected to decrease. On the other hand, expenditure on medical and long-term care is expected to increase considerably after the early 2020s. Fiscal balance is likely to become worse than the current status. Furthermore, considering the long-term demographic change, the number of people aged 65 and over becomes its peak in 2042 when the second baby-boomers become 65 years old and over and the rate of population aging reaches approximately 40% in 2060. The increasing expenditure on social security benefit will continue to be a threat to the soundness of public finance for about 50 years until around 2060 when the aging population becomes its peak. In terms of this, the government is currently implementing the comprehensive reform of social security and taxes for achieving the fiscal consolidation and the enhancement of social security simultaneously. Fiscal System Council “Basic Concept towards Fiscal Consolidation (May 30, 2014)”

18. The Future Prospect of Aging Population In 2025 the first baby boomer generation (born in between 1947 and 1949) become the late-stage elderly citizens (aged 75 years old and over) and it is estimated that the benefits regarding medical and long-term care are going to increase considerably.

2014

2025 100

Total population 126.95 million

100

80

90 Aged 75 and over First Baby Boomers 15.99(13%) (65-67 years old) 80 6.48 million

70

Aged 65-74 17.09(14%)

90

60 50

Aged 20-64 71.83(57%)

30 20

Second Baby Boomers (40-43 years old) 7.92 million

Aged 65-74 14.79(12%)

60

50

50 Second Baby Boomers (51-54 years old) 7.72 million Aged 20-64 65.59(54%)

1

3

Aged 20-64 53.93(50%)

20 Aged 19 and under 18.49(15%)

10

2

16.45(15%)

Second Baby Boomers 66-69 years old) 7.14 million

30

Aged 19 and under 14.67(14%)

10 0

0 0

Aged 65-74

40

20

0

First Baby Aged 75 and over Boomers 22.23(21%) (91-93 years old) 2.43 million

70

60

30

Aged 19 and under 22.04(17%)

10

Total population 107.28 million

First Baby 90 Aged 75 and over Boomers (76-78 years old) 21.79(18%) 5.55 million 80

40

40

100

Total population 120.66 million

70

Age 65 and over ・About 50% of national medical care expenditures ・Start to receive Basic Pension benefits ・Category first Insured Persons in Long-Term Care Insurance System

2040

0

1

2

3

0

1

2

3 (million)

(Note) The first baby boomers are those who were born in 1947-49. The second baby boomers are those who were born in 1971-74. (Source) National Institute of Population and Social Security Research “Japanese Future Demographic Projection (Dec. 2012)”

Medical Care Expenditures and the Ratio of Certification of Long-term Care in the Aged < Medical care expenditures (2011)>

< Ratio of certification of long-term care (2012) >

Medical care expenditures per capita

Publicly funded medical care expenditures per capita

Aged 75 and over

892 thousand

326 thousand

Aged 65-74

553 thousand

85 thousand

Aged 64 and under

175 thousand

27 thousand

Ratio of certification of long-term care (required livelihood support and nursing care) Aged 75 and over

31.3％

Aged 65-74

4.4％

(Note 1) National medical care expenditures per capita is calculated just by dividing the national medical care expenditures per age groups by those population. (Note 2) Publicly funded medical care expenditures per capita of each age group is calculated just by dividing the total publicly funded medical care expenditures of each age group (the aged 75 years old and over: 4.8 trillion yen, the aged between 64 and 75 years old: 3.9 trillion yen) by the population of each age group. (Sources) National medical care expenditure: Ministry of Health, Labour and Welfare “Overview of National Medical Care Expenditure (FY2011)” Population per age groups Statistic Bureau, Ministry of Internal Affairs and Communications “Population Estimates (October, 2012)” Ratio of certification of long-term care (required livelihood support and nursing care): Ministry of Health, Labour and Welfare “Survey of Long-term Care Benefit Expenditures (November, 2012)”

37

Although the number of people aged 65 and over will decrease after its peak in 2042 due to passing away of the first baby boomer generation (See Chart.1), the number of people aged 75 and over will have its peak in 2053 and the number of people aged 85 and over will have its peak in 2062 because of the aging population of the second baby boomer generation (born in between 1971 and 1974) (See Chart.1). Both the aging population rate and the average age will continue to rise (See Chart.2).

< Chart1：Changes in Population Aged 65 and over >

(thousand) 50,000

Aged 65 and over Aged 75 and over

2042 38,782

Aged 85 and over

40,000

●

34,642 30,000

2053 24,079

29,484

●

23,362

20,000

14,194

11,490

10,000

0

3,825 2010

2020

2030

2040

2050

2060

< Chart2：Trend of Population Aging Rate >

(%)

(age)

39.9%

40%

58

Population aging rate Aged 75 and over population ratio Aged 85 and over population ratio

54.1 years old

Average age (right scale)

30%

26.9% 53 23.0% 20%

13.2% 48

11.1% 10%

44.5 years old 3.0% 0%

43 2010

2020

2030

2040

2050

2060

（Sources） National Institute of Population and Social Security Research, “Japan’s Demographic Composition in the Future (estimation as of January 2012)”,

38

19. International Comparison of Population Aging Rate and Tax and Social Security Contributions Ratio While Japan’s aging population is progressing so rapidly compared with other countries, tax and social security contributions ratio in Japan is lower than other countries and the burdens are eventually shifted to future generations through the issuance of special deficit-financing bonds.

International Comparison of Population Aging Rate (%)

40

1970

2015

2025

2040

7.1

26.8

30.3

36.1

Germany

13.6

21.4

25.1

31.8

France

12.9

18.7

21.7

25.4

U.K.

13.0

18.1

20.0

24.0

U.S.

9.8

14.7

18.6

21.2

Japan

35 30 25

Japan

Germany

Japan：23.0

France

Germany：20.8

U.K. U.S.

France：16.8

20 15

U.K.：16.6 10

U.S.：13.1

5 0

1950

1970

2010

2000

2030

2050

(Source) Japan 1950-2010: “National Census” (Ministry of Internal Affairs and Communications) 2011-2050: “Japanese Future Demographic Projections” (National Institute of Population and Social Security Research) (January, 2012) Other countries: “World Population Prospects: the 2012 Revision” (United Nations)

International Comparison of Tax and Social Security Contributions Ratio [ Tax and Social Security Contributions Ratio = Total Taxes as a percentage of National Income (NI) + Social Security Contribution as a percentage of NI ] [ Potential Tax and Social Security Contributions Ratio = Tax and Social Security Contributions Ratio + Fiscal Deficit ] （NI:%） 80 70

Social Security Contributions Ratio *Figure in parentheses are percentage of GDP Potential Social Security Contributions Ratio *Figure in Parentheses are percentage of GDP

Social Security Contribution as percentage of NI Total Tax as percentage of NI

60 50

Fiscal Deficit as percentage of NI

41.6

（38.4）

10

24.1

51.9

23.3

（33.5）

37.0

25.2

58.2

（40.3)

（51.4） 68.9

52.2

（44.6）

7.5

20

21.7

30.8

17.5

10.7 （42.0）

10.7

（25.4）

40 30

51.2

47.7

61.9

58.2

（39.4）

（33.9）

（30.8）

（46.1）

（41.9）

47.5

57.6

36.7

29.5

42.1

0

0.0

-7.1

-10.3

-11.3

-9.9

-1.1

Japan

United States

United Kingdom

Germany

Sweden

France

(FY2014)

(FY2011)

(FY2011)

(FY2011)

(FY2011)

(FY2011)

-10 -20

(Note) 1. Japan: FY2014 projection, Other countries: CY2011 actual. 2. The ratio of fiscal balance to NI for Japan and the U.S. is calculated on a basis where the social security funds are excluded, while the ratio for other countries is based on the general government. (Source) OECD "National Accounts", "Revenue Statistics", etc. 39

(Reference) Comparison with OECD Member Countries International Comparison of Tax and Social Security Contributions Ratio (as a percentage of NI) (%) 90

85.2

Social Security Contributions Ratio

(38.8)

80

Tax Burden Ratio

(48.6)

70

26.7 67.7

(46.6)

(43.2) (36.0) (46.1) (43.8)(44.0) 2.7 63.5 62.5 62.2 61.9 (37.7) (41.9) 61.1 60.6

60

58.9 58.2 (42.5) (36.0) (35.0) (37.4) (39.2) (34.6) (39.4) 55.2 54.4 53.8 53.2 (37.0) 52.2 51.7 51.2 (32.4) (33.6) (32.7)

7.1 19.8

50

12.3

22.4 20.8

25.2

21.8

18.6

23.8

40 30

(29.0) (33.4) 47.7 47.5 47.5 47.4 46.8 (32.3) (31.5) 45.6 44.6 (29.0) (29.3) 1.9 42.8 (26.3) 41.5 39.8 (28.4) 9.3 10.7

10.7

17.8

22.8

19.5

20.6

10.1

17.7

21.7

0.0 17.9

65.0 58.5

20 10

36.3 35.6

6.3 18.2 15.8

55.1

42.7

34.5

36.7

7.5

2.4 (18.5) 23.4

45.5

42.9 38.2

(24.5) (21.6) 30.8 30.1

8.6 8.4

17.1

47.5 43.3

40.8

(26.2)

31.6

35.8

31.5

38.0 30.0

38.2

37.0 29.5 32.2

29.8

2.0 36.7

36.5

36.3 23.6

27.4 28.8

27.8

27.0 22.7

23.3 26.0

21.4

0

(Sources) Japan： "SNA(National Accounts of Japan)"(Cabinet Office, Government of Japan) Other Countries："National Accounts"(OECD),"Revenue Statistics1965-2011"(OECD) (Note) Figure in parentheses are percentage of GDP

MEMO

40

20. The Comprehensive Reform of Social Security and Tax ○ Report from the National Council on Social Security System Reform

(summary) (August 6, 2013)

Expenses related to social security account for more than 40% of primary balance expenses, while tax revenues cover less than half of the total expenditure, meaning that a considerable portion of fiscal burden for the expenses related to social security will be passed onto future generations that will support society in the future. If social security insurance fee equivalent to the social security benefits now being enjoyed are not ensured, and the shortfall is to be consequently filled by future generations that will support society in the future, it would pose a significant problem from the standpoint of fiscal consolidation, sustainable social security, and fairness among generations. This issue must be promptly addressed in order to minimize the burden on future generations that will support society in the future. Even though society is rapidly aging, we must think seriously about what the current generation can do to minimize the burden on future generations that will support society in the future. In any case, social security will no longer function if the benefits do not match the burden, thereby resulting in a loss of social vigor. Therefore, the social security system must be reformed along with achieving fiscal consolidation.

Securing stable financial resources through the Comprehensive Reform of Tax including consumption tax

Maintenance and enhancement of the social security system Achieving simultaneously Achievement of the fiscal consolidation targets

Enhancement of the social security system Towards social security system for all generations, providing a sense of security and satisfaction

Use of (national) consumption tax before the Reform Three social security expenses for the elderly (basic pension, medical care for the elderly, long-term care)

Enhancement of the Social Security System after the Reform Four social security expenses (child and childcare, medical and long-term cares, basic pension) Enhancement of the social security system: 2.8 trillion yen Child and childcare: Medical and long-term Basic pension: 0.7 trillion yen cares:1.5 trillion yen 0.6 trillion yen

Why consumption tax? ● Its revenue is less susceptible to economic fluctuations or demographic changes ● It can avoid concentrating the tax burden on specific working generations and ensure neutrality to economic activities ● It has high fund-raising capability

Suitable tax to secure resources for the social security system 41

The Act to Promote Social Security Reform states: “From the standpoint whereby all generations should fairly share the expenses regarding social security that widely benefits citizens, revenue from the consumption tax and local consumption tax shall be used as a major source of revenue that is necessary for the national and local governments to pay social security benefits.” Due to the recent Comprehensive Reform of Social Security and Tax, all consumption tax revenue that includes increased revenue due to the raised consumption tax rate (excluding national/local consumption tax revenues and ongoing local consumption tax revenue) shall be used for social security.

Securing Stable Financial Resources for Social Security ＜ Without taking into account the social security reform＞ ＜ With taking into account the social security reform＞ Four social security expenses (Central and Local government) 44.5 trillion yen Enhancing social security 2.8 trillion yen

Four social security expenses (Central and Local government) 37.8 trillion yen

Increasing expenditures accompanied by raising consumption tax rate (0.8 trillion yen)

Difference 19.3 trillion yen

Government contribution to the basic pension funds 3.2 trillion yen

Difference 26.6 trillion yen

Consumption tax revenue 4% (Central and Local government) (excluding current Local consumption tax revenue) 11.2 trillion yen

Using all additional tax revenues from the consumption tax hike for social security spending

37.8 trillion yen

37.8 trillion yen

For enhancing 1%

0.8 trillion yen

3.2 trillion yen 7.3 trillion yen Lower the contribution on future generations

Consumption tax revenue 4% (Central and Local government) (excluding current Local consumption tax revenue) 11.2 trillion yen

For stabilizing 4%

Increased revenue by raising consumption tax (14 trillion yen)

2.8 trillion yen

(Note 1) The calculation is based on FY2013 budget. This projection in FY2017 assumes that the consumption tax rate rises to 10% according to the Act for Comprehensive Reform of the Tax System. (Note 2) Other than the four expenses for social security in the figure above, unilateral local projects within the range are also based on the four expenses for social security. (Note 3) The Local Tax Act stipulates that the increased local consumption tax shall be used as expenses required for social security measures. The Act also stipulates that the total amount of increased local consumption tax and the statutory rate of allocated consumption tax shall be compared with the total expenses of local social security benefits that include unilateral local projects, which shall be confirmed every fiscal year as being a financial source for social security.

42

All of the increased revenue by raising consumption tax shall be used to enhance and maintain social security. Along with the permanent raise of national contribution ratio to basic pensions to 50% in order to maintain social security, the following measures are scheduled to enhance social security.

Enhancement of the social security system through Comprehensive Reform of Social Security and Tax Child and childcare

○ (Qualitative and quantitative) enhancement of support for child and childcare (e.g. addressing the problems of waiting-list children） ・ Comprehensive promotion and enhancement of regional support for child and childcare as well as infant education and care through the implementation of new system to support child and childcare ・ Implementation of the “Plan for Accelerating the Elimination of Children Wait-listed for Childcare” ・ Urgent project to secure childcare services to allow smooth transition to the new system ・ Enhancement of social nursing etc.

Medical system and long-term care

○ Reform of the system of provision of medical and long-term care services

○ Reform of the system of medical and long-term care

① Promotion of functional division and collaboration of hospital, home healthcare and inhome care ・ Enable early transition to in-house care and rehabilitation by promoting division of roles and collaboration among hospitals and smoothing the process from onset to hospitalization, rehabilitation and hospital discharge. ・ Promote in-house medical and long-term care and support the continuation of community life. ・ Secure health-care staff such as doctors and nurses. （Considering the establishment of new system of financial support and the appropriate way to deal with the medical service fee, and taking necessary measures accordingly)

① Stabilization of financial basis of medical insurance system ・ Increase of financial support for national health insurance covering many low-income earners (including the increase of financial support assumed prior to the reform of insurers and management of national health insurance) ・ Government subsidy for Japan Health Association

② Establishment of local comprehensive care system The following measures are implemented in order to establish local comprehensive care system which provides long-term and medical care, disease prevention, livelihood support and residence in an integrated manner and allows community life even when in need of longterm car ⅰ） Collaboration between medical and long-term care ⅱ） Developing the system of livelihood support and prevention of long-term care ⅲ） Measures to address dementia ⅳ） Review of support for those who need care according to the situations of each local community ⅴ） securing manpower etc. Etc.

○ Establishment of fair and stable system regarding refractory diseases and specific chronic disease for childhood

② Securing fairness related to people’s contribution on insurance fee ・ Enhancement of measures to reduce insurance fee for national health insurance paid by lowincome earners ・ Introduction of calculation of levy on longterm care in proportion to the total amounts of insured person’s wage ③ Revision on medical care covered by the medical insurance system, etc. ・ Review of expensive medical treatment cost while giving consideration for low-income earners ・ Division of functions among hospitals and review of benefit for clinic and hospitalization from the perspective of ensuring fairness compared with in-home care

About 0.7 trillion yen

About 1.5 trillion yen ※ Enhancement, prioritization and sophistication shall be jointly implemented.

④ Prioritization and rationalization of long-term care benefit ・ Review of the contribution on long-term care insurance fee for people above certain level of income ⑤ Reduction of contribution on long-term care insurance fee for the 1st class insured people with low income Etc.

Pension

○ Improvement of existing system ・ Welfare benefits for the elder and disabled with low income ・ Reduction of benefit entitlement period ・Expansion of survivors’ pension to single-father family.

About 0.6 trillion yen

Total expenses required (public expenses) ＝ About 2.8 trillion yen (Note) The table above summarizes social security as enhanced through the use of the increased consumption tax income that influences public expenses.

43

Ⅴ. Details of each policy area

1. Social Security (1) Overview Social security benefits are projected to increase rapidly because of the aging population. Especially the benefits of both medical and long-term care are projected to increase in excess of the projected GDP growth toward 2025 when the all of first baby boomer generations become 75 years old and over. Therefore, the social security system, in which benefits and contributions are balanced, needs to be established by the early 2020’s when the part of first baby boomer generations starts to be 75 years old and over. Estimation of the expense to social security 109.5 trillion yen (22.8%)

Total benefits 1.36 times

Support for child and childcare 4.8 trillion yen (1.0%) Others 7.4 trillion yen (1.5%)

Long-term care 2.34 times

148.9 trillion yen (24.4%) Others 9.0 trillion yen (1.5%) Long-term care 19.8 trillion yen (3.2%)

Long-term care 8.4 trillion yen (1.8%)

Medical Care 35.1 trillion yen (7.3%)

Medical care 1.54 times

Pension 53.8 trillion yen (11.2%)

Pension 1.12 times

GDP 479.6 trillion yen (FY2012)

GDP 1.27 times

Medical Care 54.0 trillion yen (8.9%)

Support for child and childcare 5.6 trillion yen (0.9%)

Pension 60.4 trillion yen (9.9%)

GDP 610.6 trillion yen (FY2025)

(Source) Ministry of Health, Labour and Welfare (Note) Figures in parentheses are percentages of GDP

Compared with the other generations, medical care expenditures per capita and the ratio of certification of longterm care (required livelihood support and nursing care) for people aged 75 years old and over are considerably higher. We need to take measures to streamline and prioritize the benefits of both medical care and long-term care in order to address the increase in the ratio of population aged 75 years old and over. Medical Care The ratio of total population

Long-term Care

Publicly funded Medical care medical care expenditures per Ration in the expenditures per capita national medical capita （Aged 64 and care expenditure （Aged 64 and under under :¥175 thousand） :¥27 thousand）

Aged 65-74

12.2%

21.6%

Aged 75 and over

11.9%

34.0%

¥553 thousand ¥85 thousand

¥892 thousand

¥326 thousand

Ratio in the benefits

Ratio of certification of long-term care

9.7%

4.4%

87.9%

31.3%

(Note) National medical care expenditures per capita are calculated just by dividing the national medical care expenditures per age group by the population of each generation. Publicly funded medical care expenditures per capita are calculated just by dividing publicly funded medical care expenditures per age group (4.8 trillion yen for the aged 75 years old and over, 3.9 trillion yen for the aged between 65 and 74 years old) by the population of each generation as of 2011. Ratio in the benefits for long-term care is the ratio in the benefits excluding supplementary benefits. (Source) Population ratio per age groups: Ministry of Internal Affairs and Communications “Population Estimates (October, 2012), National medical care expenditure: Ministry of Health, Labour and Welfare, “Overview of National Medical Care Expenditure (FY2011)”, Statistic Bureau, Ministry of Internal Affairs and Communications “Population Estimates (October, 2011)”, Long-term care benefits and ratio of certification of long-term care: Ministry of Health, Labour and Welfare “Survey of Long-term Care Benefit Expenditures (2012)”, Statistic Bureau, Ministry of Internal Affairs and Communications “Population Estimates (October, 2012)”

45

(2) Medical Care ① Revenue Source Structure of Health Care Expenditures The financial resources for national medical care expenditures are insurance contribution (about 50%), tax (about 40%) and patient charges (about 10%). About 50% of medical care expenditures are allocated as labour costs for staffs including doctors.

○ Revenue Source Structure National health care expenditures: approx. 43 trillion yen Central government: approx. 11 trillion yen (26.0％)

Insurance contribution: approx. 21 trillion yen (48.6％) Local Governments: approx. 5 trillion yen (12.4％)

Public funds approx. 16 trillion yen (38.4％)

Healthcare materials: approx. 3 trillion yen (6.2％)

○ Expenditure Structure Personnel costs for doctors, etc.: approx. 20 trillion yen (46.4％)

Patient charges: approx. 6 trillion yen (13.0％)

Drugs and medicines: approx. 10 trillion yen (22.6％)

Commission expenses, Utility charges: approx. 11 trillion yen (24.8％)

② International Comparison of Medical Services Compared with other countries, the average duration of hospital stay is longer and the number of hospital beds per thousand population is larger in Japan. In addition, the share of generic drugs remains low in the off-patent drug market in Japan. Therefore current Japanese medical care system should be improved in terms of reducing patient charges, tax expenditures, and insurance contribution while maintaining the quality of medical care.

Country

The average length of a hospital stay

longer

The number of sickbeds per thousand of people

higher

Share of generic drugs in the off-patent drugs market lower rate

Japan

３２．０ （17.9）

１３．４

approx. 40%

Germany

９．３ （7.9）

８．３

approx. high 80%

France

１２．６ （5.1）

６．４

approx. high 60%

U.K.

７．３ （6.5）

３．０

approx. high 70%

U.S.

６．１ （5.4）

３．１ ※

approx. 90%

(Source) OECD Health Data 2013（the share of generic drugs in the off-patent market : the materials in working group within Ministry of Health, Labour, and Welfare (October 31, 2012)) (Note1) ※ is the data of 2010 (Note2) The figures of the average duration of hospital stay in parentheses is for acutely-ill patients except for Japan where that is for general patients.

46

③ Regional Differences in Medical Services and Medical Care Expenditure This graph shows the trend that the larger the number of hospital beds, the larger the cost of medical care. Therefore it could be said that the large number of hospital beds paradoxically create the additional demand of medical care. The number of hospital beds per population differs largely among prefectures. (hospital beds per ten thousands of people)

(thousand yen)

Gap between prefectures: Approx. 1.6 times

300

The number of hospital per tenpeople thousands of people sickbedsbeds per million National health care expenditures per capita (thousand yen) Line shape (National health care expenditures per capita (thousand of people))

250

450 398.4

400

248 350 200

300 301.9 250

254.8

150

200

Gap between prefectures: Approx. 3 times

124 100 82

150 100

50

0

Kanagawa Saitama Aichi Chiba Tokyo Gihu Shiga Shizuoka Tochigi Miyagi Ibaraki Mie Nagano Hyogo Nara Osaka Average Gunma Niigata Yamagata Yamanashi Aomori Hukushima Okinawa Iwate Kyoto Hukui Wakayama Hiroshima Akita Okayama Tottori Kagawa Shimane Ehime Toyama Ishikawa Oita Hukuoka Miyazaki Hokkaido Saga Yamaguchi Nagasaki Tokushima Kumamoto Kagoshima Kochi

50 0

(Source) Statistics Bureau, Ministry of Internal Affairs and Communications “e-Stat” (Portal Site of Official Statistics of Japan)

④ Collaboration in Medical and Long-term Care To reform a system for medical service provision, both medical service and nursing care should be reviewed comprehensively. In order to support the lives of patients, etc. in their familiar communities with in-home care, etc., and to establish a seamless and comprehensive network among medical service, nursing care, prevention, life support and residents in each region, a system to provide comprehensive regional care need to be established . The outline of the Comprehensive Regional Care Systems

In the case of a need of Long-term care …

In the case of a disease …

Long-term care system

Medical system

・Hospitals for acute phase ・Hospitals offering the rehabilitation service for postDaily medical service: acute phase and recovery ・family doctors phase ・Hospitals in regional area cooperating with other hospitals

Going and entering to facilities Going to hospitals or hospitalization

House

■Home service: ・Home-Visit Long-Term Care ・Home-Visit Nursing ・Outpatient Day Long-Term Care ・Multifunctional Preventive Long-Term Care in a Small Group Home ・Short-Term Admission for Daily Life LongTerm Care ・Visiting service 24 hours a day ・Composite service (Multifunctional Preventive Long-Term Care in a Small Group Home and Home-Visit Nursing) etc. ■Preventive Service of Long-Term Care A person with dementia

・House ・House for elderly people with care service They will talk over and coordinate care systems. ・Comprehensive Regional Support Centers ・Care manager

To live always cheerfully…

Life support and care prevention

*The Comprehensive Regional Care Systems are assumed to work in daily activity area where demanded service will be supplied in about 30 minutes (junior high school district).

Activities by old-people's club, resident's association, volunteer and NPO etc.

47

■Facility service and residence service ・Facility Service for Long-Term Care Covered by Public Aid ・Long-Term Care Health Facilities ・Communal Daily Long-Term Care for a Dementia Patient ・Daily Life Long-Term Care Admitted to a Specified Facility etc.

(3) Long-term Care Cost for long-term care has become three times larger over the past 10 years since its establishment (FY2000:3.6 trillion yen → FY2014：10.0 trillion yen). Thus, it is essential to ensure the appropriateness of long-term care cost in the light of maintaining its sustainability. FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

First Period

Second Period

Third Period

Fourth Period

Fifth Period

Trend of total expenses (Unit: trillion yen) (Note)FY2000-2012: Actual, FY2013 and 2014: Budget

3.6

4.6

5.2

5.7

6.2

6.4

6.4

6.7

6.9

7.4

7.8

8.2

8.8

9.4

10.0

Trend of insurance fee for the first class insured people (national average)

2,911 yen

3,293 yen

4,160 yen

4,090 yen

4,972 yen

Public funds include not only for long-term care benefit but also for the measure which reduces the insurance contribution by the second class insured people and thus accounts for 52% in total. As for the structure of expenditures of long-term care, personnel cost accounts for more than 50%.

Revenue Source Structure Total expenses of long-term care insurance(FY2014 initial budget: approx. 10.0trillion yen)

Central government 2.6 trillion yen (26.4％)

Insurance

Local governments contribution Insurance contribution User charges (second class) (first class) 2.6 trillion yen 0.7 trillion yen 2.1 trillion yen 1.9 trillion yen (25.7％) (7.3％) (21.1％)

Public funds: 5.2 trillion yen (52.1％)

（19.5％）

Insurance fees: 4.1 trillion yen (40.6％)

Expenditures Structure Personnel cost approx. 5.5 trillion yen (approx. 55％)

Except for personnel cost approx. 4.5 trillion yen (approx. 45％)

(Source) Expenditures structure is projected based on MHLW “Briefing Survey on Economic Conditions in Long-term Care (FY2013)” (Note) Insurance fee for the first class insured people: paid by insured people aged 65 and over (first insured person) Insurance fee for the second class insured people: paid by insured people aged 40-64 (second insured person)

48

It is pointed out that compared with the other business sectors, the long-term care business sector has good business performance and it has a large amount of internal reserve. In the light of this, the level of reward for long-term care suppliers should be more appropriate through its revision because it is mainly financed by tax and insurance contribution. 16.0%

14.0% Cohabitation care which addresses dementia 12.0%

10.0% Day care 8.0% Welfare facilities for the elderly who need care（Special elderly nursing home）

6.0%

Data of total industry are from ‟Financial Statements Statistics of Corporations by Industry” 4.0%

2.0% Data of Small and medium-sized businesses are from‟Basic Survey on Small and Medium Enterprises”

0.0% 17年度調査 （18年度） FY 2005 (FY2006)

19年度調査 FY2007 20年度調査 FY2008

（21年度） 23年度調査 (FY2009) 22年度調査 FY2010 FY2011

（24年度） (FY2012) 25年度調査 FY2013 26年度調査 FY2014

(Note 1) Gap ratio of long-term care business FY2005, FY2008, FY2011, FY2014: Ministry of Health Labour and Welfare “Fact-finding Survey on Economic Conditions in Long-term Care”, FY2007, FY2010, FY2013: Ministry of Health Labour and Welfare “Briefing Survey on Economic Conditions in Long-term Care” The data of FY2006, FY2009 and FY2012 are linearly supplemented. (Note 2) Gap ratio＝(Revenues－Expenditures) / Revenues Revenues ＝Revenues from long-term care business ＋ Revenues from other businesses － Reversal of special accumulated fund such as national subsidy, etc. Expenditures ＝Expenditures for long-term care business ＋ Expenditures for other businesses ＋ Extraordinary loss－reversal of special accumulated fund such as national subsidy, etc.

(4) Pension Under the 2004 revision, in light of a rapidly aging society with a declining birthrate, a framework for new pension finances has been established so as to ensure a sustainable pension system in the future. Thus, the pension financing system is stable in the long term.

The mechanism for stability of the current pension program (Revised in 2004) ⇒ With the aim of establishing a mechanism which automatically responds to changes in the population structure and economic situation The government’s financial (1) Revision of pension amount in accordance with the contribution (50%) to basic state increase in price, etc. pensions （⇒ To respond to the impact on pension financing due to the * Perpetuated by assuring stable revenue sources through fundamental reform of the tax system

(2) Adjustment of pension amount by microeconomic slides

Use of reserve funds

（⇒ To respond to the impact on pension financing due to the falling birth rate and the aging population） * As the lower limit of the pension benefit level, an income replacement rate of 50% is assured for households receiving standard pension benefits.

Increase of insurance rate by fixing the upper limit

Insurance revenues

economic trend）

Reserve funds

State Contributions

Pension benefits

(Tax revenues)

49

(5) Decline in Birthrate About 2.70 million babies were born in the first baby-boom and about 2.09 million babies were born in the second baby-boom. However, only about 1.03 million babies were born recently and the number of children has been drastically decreasing. The fertility rate recorded the historically low level 1.26 in 2005 and has gradually recovered to 1.43 in the latest figure.

Trend of the Births and the Total Fertility Rate (unit: thousand people)

1st baby boom Hinoeuma (1947~1949) (1966) The highest births 2.7 million people 1.36 million people

2nd baby boom (1971~1974) 2.09 million people

1.57 shock (1989) 1.25 million people

4.32

(2013) The lowest births 1.03 million people

(2005) The lowest total fertility rates

2.14 1.57

1.58

1.26

1.43

(Source) MHLW, Vital Statistics

The government shall develop a plan to accelerate the resolution of such waiting children, intensively improve child care for approx. 200,000 children in the period of urgent intensive efforts for the two years of FY2013 and FY2014, and ensure child care for approx. 400,000 children by the end of FY2017, so as to cover the potential need for child care. The number of children on nursery waiting list tended to increase until 2010, after that it has decreased for four consecutive years. The number of children on nursery waiting list was 21,000 as of April 2014. Among them, the children (0-2 years old) account for approx. 84.5% (18,062) of all children on nursery waiting list.

Plan to Accelerate Elimination of Children Wait-listed for Childcare Services Peak of childcare demand FY2013

FY2015

0.4 million children

0.2 million children Urgent intensity measures period

Urgent Project

FY2019

FY2017

Accelerating measures period Front loading 2 years

Measures under the new system

*exploring financial resources

Securing financial resource by VAT

Aiming to eliminate the waitlisted children

New system starts

The period of the project of regional support for child and childcare（FY2015～2019）

The transition of the number of children awaiting places and the capacity of nursery 30,000

2.4

the number of children awaiting places

25,384 26,275 25,556 24,825

2.29

2.3

25,000 22,741 20,000

17,926 2.11

19,550

21,371

2.24

2.13

2.2

2.2 2.16

2.1

2.12

15,000 2

10,000

1.9 2007

(Source) MHLW

2008

2009

2010

50

2011

2012

2013

2014

the capacity of nuesery (unit: million people)

2.34

2. Education, Science and Technology (1) Education Since 1989, expenditure by the central and local governments on public education per child has increased by 60%. Since 1989, the number of children attending public elementary and junior high schools has decreased by 30% due to the low birthrate, while expenditure on public education (public elementary and junior high schools) per child has increased by 60% because this total amount of expenditure has been kept almost at the same level. (trillion yen)

(10 thousand students) Public education expenses (of the education expenses, those disbursed by the government and municipalities)

12.0

1,600

14.88 million students 9.0 tri l lion yen 【5% increase】

10.0

1,400 8.0

894 thousand yen 【55% increase】

8.6 trillion yen

1,200

Public education expenses disbursed for each

6.0 578 thousand yen

10.05 mi l lion s tudents 【32% decrease】

Number of children attending schools

4.0

1,000 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011 (FY)

(Source) “Basic Research on Schools” and “Research on Local Education Expenses”

The percentage of educational expenditure covered by the central and local governments per child is maintained at a level comparable with that in other advanced countries. The ratio of educational expenditure borne by the central and local governments in Japan to GDP is about 70% as compared with the same ratio in other advanced countries. On the other hand, since the ratio of the number of children to the total population is also about 70%, Japan’s educational expenditure per child is considered to be at a level comparable to that in other advanced countries. ○ The ratio of public expenditure on education facilities (2010) (at all levels of education from kindergarten to graduate school)

○ Number of pupils / students attending all educational facilities (%) from kindergarten to graduate school / total population (2010)

(%)

30

8 7

G5 Average (except for Germany): 5.4%

6

OECD Average: 5.8%

G5 Average: 20.5%

25

OECD Average: 22.3%

20

5

70%

70%

4

15

3

10

2

5

1

6.3

5.9

5.5

3.8

U.K.

France

U.S.

Japan

23.2

22.0

U.S.

U.K.

19.8

15.5

France

Germany

Japan

(Source) OECD “Education at a Glance 2013”

(Note) Germany data is not available (%)

21.8

0

0

○ Public expenditure on education per child / per capita GDP (2010)

30

OECD Average: 25.4%

25 20 15 10 5

27.0

26.9

25.7

U.K.

France

Germany

24.3

22.5

Japan

U.S.

0 (Source) OECD stat

51

G5 Average: 25.3%

The number of pupils/students per teacher is equivalent level compared to other developed countries. While the number of children attending public elementary and junior high schools has dropped by 30% with decline in birth rate, there has been no significant change in the number of teachers. Consequently, the number of pupils / students per teacher has fallen to a level comparable to other major advanced countries. The number of pupils / students per teacher (2011)

Trends in the number of pupils / students per teacher (10 thousand people)

(10 thousand people)

(people)

25

80.0 Number of teachers (Public elementary and junior high school)

716 thousand 70.0

Elementary school

2,200

Junior high school

19.9

20.8 60.0

20

2,000 648 thousand 【-9%】

18.4

18.1

1,800 50.0

14.2

15

15.3 15.2

15.2

17.6

16.3 14.2

14.8

14.7

1,600

40.0

14880 thousand The number of pupils / students per teacher

30.0

15.1 【 -27%】

Number of pupils / students

20.0

10

1,400 1,200

5 1,000

10.0 9810 thousand 【-34%】

0.0

0

800

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY)

Japan

(Source) “School Basic Survey”

U.S.

U.K.

Germany

France

G5 Average

(Source) OECD “Education at a Glance 2012”

(2) Science and Technology To maximize the outcome of science and technology-related investments, it is necessary to selectively allocate budget funds to high-priority projects. In the recent severe financial conditions, for science and technology, budget has been secured to promote the advancement of science and technology (i.e. sustainable research and development for the future, measures to address important tasks, basic research, human resource development).

Comparison of science and technology expenditures with general expenditures 300

General expenditure

286.6

293.9 297.1

300.8 304.2307.5 297.3 298.0

264.1

261.3

250.2

250

298.5

274.5

Science and Technology expenditure Social Security expenditure

293.2 290.3

248.2

230.5

226.1

277.8

240.2 265.1

213.9 189.6

200

198.8

169.4

150 100

152.7

152.6

159.8

166.4

172.9

180.2

185.5 187.3

192.5

198.3

146.5 132.5 135.1 165.7 130.1 119.7 113.2 158.4 126.8 156.8 158.7 106.1 152.0 151.8 116.0 122.7 111.2 142.8 139.5 139.6 139.8 138.7 105.7 137.6 141.1 136.0 137.8 138.7 100.0 128.5 130.7 126.6 123.7 119.9 113.6 117.1 108.7 103.8 122.3

132.7142.0

50

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY) (Note) Trends in outlays for promoting science and technology, and general expenditures, shown by assuming the values as of FY1989 to be 100.

○ Science and technology expenditures are mainly allocated for the measures to strengthen the cooperation among ministries, the measures to support cutting-edge R&D in the area of life science such as regenerative medicine and drug discovery areas, etc. and the measures to launch the projects which strengthen international competitiveness.

52

3. Central and Local Governments The proportion of expenditures between central and local governments is approximately 4:6. The proportion of tax revenue resources is approximately 4:6 as well due to the finance transfer of local allocation tax, etc. ○ Distribution of Tax Revenue Resources of the Central and Local Governments, and Expenditure Proportions

【Revenue】

(Central government)

(Local governments)

National tax revenues

Local tax revenues

５７.６ ％

４２.４ ％

５８ ： ４２

５６.３ ％

４４ ： ５６

(FY2014 Initial Budget) (Note) Local tax revenues include estimated amount of fiscal plan of local governments and excess taxation and non-law tax and local transfer tax of special corporation surtax.

４３.７ ％

Local allocation tax (corresponding legal ratio) and local transfer tax: 14.0%

【Expenditure】 (FY2012 Settlement)

National annual Expenditure (net budget)

Regional annual expenditure (net budget)

４１.７ ％

５８.３ ％

National ：Regional

National expenditure

：

Regional expenditure

４２ ： ５８

Fiscal transfer: 22.1% (Source) “The situation of public finance of local governments” March, 2014

From the perspectives of both flow and stock, the public finance situation is extremely severe when compared to the situation of local governments. ○ Primary Balance and Fiscal Balance of the Central and Local Governments (FY2012 actual)

Primary balance

Fiscal balance

Central

Approx. ▲30.5 trillion yen

Approx. ▲36.5 trillion yen

Local

Approx. +2.8 trillion yen

Approx. +0.1 trillion yen

(Source) Cabinet Office “National Accounting”

○Trends in Long-term Debt Outstanding of Central and Local Governments 30 years ago

20 years ago

10 years ago

Present

(As the end of FY1984)

(As the end of FY1994)

(As the end of FY2004)

(Estimate as the end of FY2014)

Approx. twice

Central

135 trillion yen Approx. twice

Local

55 trillion yen

Approx. twice

261 trillion yen

531 trillion yen

Approx. twice

106 trillion yen

Increase approx. 300 trillion yen

811 trillion yen

Remain roughly flat

201 trillion yen

200 trillion yen

(Note) The borrowings in the Special Account for Local Allocation and Local Transfer Tax are shared by the central and local governments in accordance with their shares of redemption. The amount of the borrowings outstanding incurred by the central government was transferred to the general account at the beginning of FY2007, so that the borrowings outstanding in the Special Account since the end of FY2007 is the debt of the local governments (approx. ¥ 33 trillion).

53

The financial gap between local governments is principally caused by the fact that revenues from local taxes, especially, the two local corporation taxes (corporate enterprise tax and corporate inhabitant tax), are unevenly distributed to major cities including Tokyo. In the case of local consumption tax, such an uneven distribution has been significantly alleviated by adopting the inter-regional adjustment system. The special local corporation tax contributes to alleviating the uneven distribution of revenues from the two local corporation taxes. Index of per capita revenues as local taxes (as settled for FY2012) (by assuming the nationwide average to be 100)

(Note 1) The “Local government finance plan for FY2014: 37.2 trillion yen” includes the special local transfer corporate tax of 2.2 trillion yen. (Note 2) Individual inhabitant tax revenues refer to the total amount on a per capita basis and per income basis. Also, fixed asset revenues include those of prefectures. (Note 3) The populations refer to those based on the Basic Resident Register as of March 31, 2013. (Remarks) Compiled according to the settled values for FY2012 (excluding the over-assessed tax amounts).

Index of per capita revenues as taxes generated among municipalities according to mechanical standards, or transferred to each municipality (by assuming the nationwide average to be 100)

(Note 1) The two local corporation taxes (after the transfer of special local corporation taxes) refer to the amount calculated by adding special corporation taxes transferred for FY2012 (1.6 trillion yen). (Note 2) The populations refer to those based on the Basic Resident Register as of March 31, 2013. (Remarks) Compiled according to the settled values for FY2012 (excluding the over-assessed tax amounts).

54

While the government has been pushing ahead with streamlining subsidies for local governments, social security-related subsidies have been rising due to the declining birthrate and aging population. In FY2014, social security-related subsidies occupy approximately 70% of the overall subsidies from the central government.

Overall Picture of Subsidies from the Central to Local Governments (FY2014 budget)

(trillion yen)



20.4

Education and Science 2.9 （14%）

Social Security 11.7 （57%）

Public Works 4.8 （24%）

Others

1.0 (5%)

24.7



23.2

Social Security 17.4 （70%）

Child-care allowance, etc. People with disabilities self-help support programs

Medical care for elderly people

Public assistance

Long-term care insurance

5.3

2.9

2.4 National health insurance managed by municipalities

Education and Science 2.2 （9%）

Public Works 2.7（11%）

Others

1.0 (4%)

Compul s ory Educa ti on

2.3

1.4

1.3

Allowance for Child, etc.

55

0.7

1.5 Effectively free public High school tuition 0.4

2.1 General subsidy for social infrastructure improvement

Special Account for Reconstruction from the Great East Japan Earthquake 1.5 (6%) The Great East Japan Earthquake Reconstruction Grants 0.4

4. Public Works Establishment level of social infrastructures has been improved in Japan. However, as Japan will face with decreasing population in the future, the government needs to selectively allocate budgetary funds to highpriority public works and to further streamline public works.

(1) Trends in Public Works-related Expenditures Public works-related expenditures in FY2014 initial budget: 5968.5 billion yen (up ¥ 683.2 billion or 12.9%, on a year-on-year basis) ※ If effect (616.7 billion) of the abolishment of the special account for social infrastructure development and the integration to the general account are excluded from FY2014 budget: 5351.8 billion yen (up ¥102.2 billion or 1.9%, on a year-on-year basis) (Note) It excludes the transfer to the special account for recovery from the Great East Japan Earthquake (35.6 billion yen) that has been allocated to individual ministries. （trillion yen）

16.0

14.9

14.2

14.0

12.5 10.5

9.9 8.5 8.1 8.5

8.0 6.0

12.2 11.2

12.0 10.0

■Initial Budget

7.3 7.3

7.7

8.1

8.5

8.9 9.2

□Supplementary Budget 11.5 11.3

10.5 9.6 9.7

10.0

9.0

9.4 9.4 9.4

8.3 8.9 8.0 7.8

8.8 7.4 7.3

7.8 7.0

6.4 8.4 8.1 7.8 7.5 7.2 6.9 7.1 6.7 5.8 5.0

4.0

4.6

6.3

5.3

6.0

2.0 0.0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY)

(Note) Excluding NTT-A type.

(2) Trends in the Breakdown of Public Works-related Budget (by type of project)

Agriculture And rural community development 11%

Sewage system 16%

Others 6%

FY2004 （Initial Budget） Total ¥ 7815.9 billion

Housing and urban development 22%

Others Erosion and 3% flood control 14%

Erosion and flood control 15%

General subsidy for social infrastructure improvement 33%

Roads 23%

FY2014 （Initial Budget） Total ¥ 5968.5 billion

Agricultural, forestry and fishes infrastructure development 10%

Ports, airports and train etc. 7%

Ports, airports and train etc. Housing and 7% Urban development 9%

Parks, Waterworks and Waste control 2%

56

Roads 22%

(3) Change in Socio-economic Conditions and Progress of Social Infrastructure Improvement Economic growth and population dynamic etc.

CY 1990

CY 2012

Change

Progress of social infrastructure development ○Number of dams

○GDP(Nominal, trillion yen)

442.8

⇒

472.6

(+6.7%)

○Component rate of GDP by type of economic activity ・Primary industries(%) ・Secondary industries(%) ・Tertiary industries(%)

2.4 35.4 62.2

⇒ ⇒ ⇒

1.2 23.9 74.9

(-50.0%) (-32.5%) (+20.4%)

2,808

⇒

2,754

(-1.9%)

127,500

(+3.1%)

○National income per capita (Nominal(FY), thousand yen)

○Population(thousand people)

123,610 ⇒

○Total road length (Highstandard road)(km) ○Number of quays at major ports(Number of locations) ○Sewage diffusion rate(%)

FY 1990

Change

313

⇒

572

(+83%)

5,281

⇒

10,490

(+107%)

7

⇒

73

(+943%)

62

⇒

88.1

(+42%)

※FY 1997

○Developed farming areas (10,000 hectares)

FY 2013

260

※FY 2012

⇒

311

(+20%)

※FY 2011

(4) Trend of General Government Fixed Capital Formation as a percentage of GDP Japan has been taking a sharp downward trend, but still keeps a higher level than Europe and U.S.. 7.0

6.3 5.7

6.0 5.0

4.8 4.8

6.0

6.2

5.9 5.5

5.7 5.6 5.1

5.0

4.9

4.6 4.2

4.0 3.0 2.0 1.0

Japan

3.6 3.5 3.4 3.4 3.6 3.4

3.6 3.3 3.53.2 3.2 3.1 3.2 3.7 3.3 3.2 3.4 3.1 3.0 3.1 France 3.3 3.2 2.9 3.0 2.9 2.8 2.8 3.1 3.0 2.7 3.1 3.1 3.2 2.7 2.5 2.6 2.6 U.S. 2.5 2.4 2.6 2.5 2.4 2.4 2.4 2.4 2.3 2.4 2.4 2.4 2.4 2.5 2.5 2.5 2.4 2.3 2.3 2.2 2.3 2.6 2.3 2.3 2.3 2.0 2.5 U.K. 2.2 1.8 1.8 1.6 1.8 2.2 2.2 2.2 2.2 2.1 2.1 1.8 1.9 2.3 2.2 1.9 1.9 2.1 1.9 1.9 2.0 1.9 Germany 1.8 1.7 1.7 1.5 1.5 1.6 1.5 1.6 1.6 1.5 1.4 1.5 1.5 1.6 1.2 1.3 1.3 1.2 3.2 3.1

2.9

0.0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

(CY/FY)

(Source) Japan: Cabinet Office “National Accounting” (fiscal year basis) Other countries: OECD “National Accounts” (OECD Stat Extracts) (calendar year basis), “Economic Outlook 70” (1989-1990 data for Germany) (calendar year basis)

(5) Strict Management of Project Assessment With strict management of project assessment, newly approved projects are narrowed down, some projects are discontinued or under a thorough review. (In FY2014, 5 projects were discontinued and 1 project is downsized.) ○ Flow of project assessment (a project carried out by the central government) (Approval of new projects)

Assessment at the planning stage

(Completion)

(Start of work)

Assessment made when a new project is approved

Re-assessment

(3 years after re-assessment)

(Projects not started within 3 years) (Projects continuing for 5 years)

57

Ex post facto assessment

(Within 5 years after completion)

5. National Defense It is important to develop a highly effective and comprehensive defense capability based on the “National Defense Program Guidelines” and “Medium Term Defense Program (FY2014-FY2018)” and to rationalize and streamline expenditures through cost reduction, etc..

○ Trends in National Defense Expenditures (billion yen) 5100 5000 4900

4856.0 （▲1.0％）

4800

4813.6 4801.3 4779.6 4774.1 （▲0.9％） （▲0.3％） （▲0.5％） （▲0.1％）

4790.3 （0.3％）

4775.2 （▲0.3％）

2010

2011

4884.8 （2.8％）

4713.8 （▲1.3％）

4753.8 （0.8％）

4700 4600

2005

2006

2007

2008

2009

2012

2013

2014

(FY )

○ Breakdown of National Defense Expenditures There are three types of national defense expenditures: (1) personnel and provisions expenses, (2) obligatory outlay expenses and (3) general material expenses. (1) and (2) occupy approximately 80% of the total, so it is important to put a curb on personnel costs and new contracts that would bring about ex-post payment. FY2014 Initial Budget (Total 4,884.8 billion yen) (Unit：billion yen) General material expenses Personnel 997.4 and provisions （20.4％）

Obligatory outlay expenses 1794.4 （36.7％）

expenses 2093.0 （42.8％）

1) Personnel and provisions expenses ・・・ Salaries for SDF personnel and food expenses for those living in defense facilities. 2) Obligatory outlay expenses ・・・ Expenditure on equipment and materials to be dispensed in FY2014 based on contract made in FY2013 and preceding fiscal years. The ex-post payments of contract in FY2014: 2,173.3 billion yen (up 443.4 billion yen over the previous fiscal year) 3) General material expenses ・・・Expenditures on equipment and materials to be dispensed in FY2014 based on contracts signed in FY2014

○ Efforts for Cost Reduction The Medium Term Defense Program describes that defense capability will be developed while rationalizing and streamlining through procurement reform, etc. The costs of building and purchase of new equipment will be reduced through life extension of main equipment (warships and aircraft). Also costs will be reduced by stocking up equipment in a short time.

〔Summary of the National Defense Program Guidelines〕 ○ In light of the National Security Strategy, Japan will strengthen its diplomatic and defense capabilities along the policy of “Proactive Contribution to Peace” based on the principle of international cooperation, thereby expanding the role it can play. At the same time, Japan will contribute even more proactively in securing peace, stability and prosperity of the international community while achieving its own security as well as peace and stability in the Asia-Pacific region by expanding and deepening cooperative relationships with other countries, with the Japan-U.S. Alliance as its cornerstone. ○ Japan will build a comprehensive defense architecture and strengthen its posture for preventing and responding to various situations. In addition, Japan will strengthen the Japan-U.S. Alliance and actively promote bilateral and multilateral security cooperation with other countries while closely coordinating defense and diplomatic policies. Japan will also seek to establish an infrastructure necessary for its defense forces to fully exercise their capabilities. ○ Under the Constitution, Japan will efficiently build a highly effective and joint defense force in line with the basic principles of maintaining an exclusively defense-oriented policy, not becoming a military power that poses a threat to other countries, while adhering to the principle of civilian control of the military and observing the Three Non-Nuclear Principles. ○ In light of the increasingly tough fiscal conditions, Japan will strive to achieve greater efficiency and streamlining in the defense capability buildup to curb costs, and harmonize with other initiatives in other fields to ensure that Japan’s defense force as a whole can smoothly fulfill its expected function.

58

(approved by the Security Council and the Cabinet on December 17, 2013)

Present（as of the end of FY2013）

Future

【Ground Self-Defense Force】 approx. 159,000 159,000 Authorized Number of Personnel （approx. 151,000 （approx. 151,000 （Active-Duty Personnel / / approx. 8,000） / approx. 8,000） Reserve-Ready Personnel） tanks approx. 700 approx. 300 howitzers/rockets approx. 600 approx. 300 【Maritime Self-Defense Force】 Destroyers(Aegis-Equipped Destroyers) Submarines Combat Aircraft

47 (6)

54 (8)

16 approx. 170

22 approx. 170

【Air Self-Defense Force】 Combat Aircraft Fighters

approx. 340 approx. 260

approx. 360 approx. 280

6. Official Development Assistance Official Development Assistance (ODA) enhances the trust and presence of Japan through cooperation provided toward developing countries. Japan ensures necessary budget and projects in order to deliver strategic ODA with the following pillars: measures against terrorism, etc. to establish a safe, peaceful international environment; measures against poverty, etc. to promote human security; support for development of Japanese business overseas, etc. The achievement of Japan’s ODA can be compared favorably with such assistance provided by other major countries. ○ Definition of Official Development Assistance (ODA) ODA consists of bilateral provision of aid (grant aid programs/technical cooperation) for developing countries and government loans (yen-denominated loans), as well as donations for international organizations, etc. More specifically, it includes support for measures against environmental problems, food aid, establishing infrastructure such as roads and bridges, and financial and technical aid provided by the Japanese government and the Japan International Cooperation Agency (JICA), etc. Grants aid (construction of schools/ hospitals, relief for natural disaster victims and refugees, assistance to NGO and debt waivers, etc.) Grants Technical cooperation (dispatching of Japan Overseas Cooperation Volunteers and accepting Bilateral trainees, etc.) Government loans (loan aid) (infrastructure development such as road, bridges, power plants, etc.) Contributions to international organizations (UNICEF and WHO, etc.)

ODA (Official development assistance)

○ Scale of ODA Projects ODA projects (on a budget base), which comprise the General Account ODA budget as well as yen-denominated loans, contribution bonds for international organizations, and supplementary budget in the preceding fiscal year have increased in 2014 relative to the previous year. Grant aid / technical cooperation (General Account, etc.)

Contribution to International Organizations

¥ 590.7 billion

¥368.6 billion

2013 ¥1,882.9 billion 2014 ¥1,937.5 billion (+ 2.9%)

¥ 547.9 billion

Yen-denominated loans

¥923.6 billion

¥386.6 billion

¥1,003.0 billion

(Note 1) As it is calculated at the budget stage and does not include debt relief. Consequently, there may be a discrepancy from the ODA project volume (calendar year) registered in the Development Aid Committee of the OECD. (Note 2) Excluding temporary measures (immediate financial yen loans (FY2011)) in consideration of the Lehman shock.

○ Trends in ODA Performance in Major Countries Taking a look at the ODA achievements of major countries, Japan is ranked second in terms of the gross amount of projects as of 2013, and compares favorably with other major nations. Regarding the net project quantity (gross project quantity－ government loans paid back), Japan is ranked 4th (as of 2013) because the amount paid back has recently been increasing.

＜Gross Basis＞

(million dollar)

＜Net Basis＞

(million dollar)

35,000

35,000 ○ U.S. （32,216）

30,000

○ U.S. （31,545）

30,000

25,000

25,000 ◆ Japan （ 22,732）

20,000

20,000 × U.K. （18,386）

× U.K. （17,881）

□ Germany （16,046）

15,000

▲ France （12,750）

10,000

5,000

□ Germany （14,059）

15,000

◆ Japan （11,786）

10,000

▲ France （11,376）

5,000

0 04

05

06

（Source）OECD data

07

08

09

10

11

12

0

13 (CY )

（Note）Figure in parentheses are 2013 provisional.

04

59

05

06

07

08

09

10

11

12

13 (CY )

7. Agriculture, Forestry and Fisheries The size of the livestock industry, etc., has increased and the ratio of full-time farming households has risen, whereas the development of land-extensive farming is very slow and the ratio of fulltime rice growers still remains low. Also, the aging of the population is advancing. Based on such situations, it is necessary to enhance the constitution of agriculture so as not to rely on subsidies, by expanding the scale and reducing production cost. Change in Average Operating Size per Farmer (by operating sector) 1960 National Operating farmland Hokkaido (hectare) Other prefecture Paddy rice (are) Dairy cattle (number of cattle) Beef cattle By operating sector (number of cattle) (National) Hog raising (number of hog) Chicken egg farming (number of chickens) Broiler chicken farming (number of chickens)

1965

1975

1985

1995

2000

2005

2010

2013

Rate of scale expansion (2013/1960) (2.12) 2.4

0.88

0.91

0.97

1.05

(1.50)

(1.60)

(1.76)

(1.96)

3.54

4.09

6.76

9.28

(13.95)

(15.98)

(18.68)

(21.48)

(23.18)

6.5

0.77

0.79

0.80

0.83

(1.15)

(1.21)

(1.30)

(1.42)

(1.52)

2.0

55.3

57.5

60.1

60.8

(85.2)

(84.2)

(96.1)

(105.1)

…

2.0

3.4

11.2

25.6

44.0

52.5

59.7

67.8

73.4

1.9 (2010/1960) 36.7

1.2

1.3

3.9

8.7

17.5

24.2

30.7

38.9

43.1

35.9

2.4

5.7

34.4

129.0

545.2

838.1

1,095.0

1,436.7

1,738.8

724.5

-

27

229

1,037

20,059

28,704

33,549

44,987

50,221

-

892

7,596

21,400

31,100

35,200

38,600

44,800

54,400

1860.0 (2013/1965) 61.0 (2013/1965)

(Source) “Agriculture and forestry census,” “Animal husbandry statistics,” “Livestock rearing trend” and “Livestock logistics and distribution statistics” issued by the Ministry of Agriculture, Forestry and Fi

Shares of Full-time and Part-time Sales in terms of Product Category (monetary amounts) (2012)

Trends in the Number of Farming Households and the Agricultural Workforce 1960 Number of farming households (thousand) Sales farming households (thousand) (Proportion) Full-time farmer (thousand) (Proportion) Agricultural workforce (thousand)

Those aged 65 or older (thousand) (Proportion)

1970

1980

1990

2013

2530

･･･

･･･

2970 2340 1630 (77.5) (74.9) (64.5)

1460 (･･･)

･･･

･･･

820 500 360 (21.4) (16.0) (14.2)

320 (･･･)

14,540 10,350

6970

6060

5400

4660

･･･

･･･

･･･

･･･

Trend in the Budgets for Agriculture, Forestry and Fisheries

･･･

3830

4820

3120

3890

2610

Peak (FY1982) 3,701.0

3,000

(unit: billion yen)

Total amount of agriculture forestry - fishery - related budget

(FY2014) 2326.7

2,500 (FY1975) 2,176.8

(FY1975) 1,572.0

1,000

Non-public works

(FY1982) 2,226.1

(FY2000) 1,764.0 (FY2014) 1668.9

(FY2000) 1,663.9

(FY1982) 1,475.0

Public works 500

(FY2014) 657.8

(FY1975) 604.7

0 1975

1980

1985

1990

2390

1710 1600 2060 1610 1480 (24.5) (33.1) (52.9) (61.6) (61.9)

High level for recent years (FY2000) 3,427.9

3,500

1,500

2010

(Source) “Agriculture and forestry census” and “Dynamic agricultural structure survey” issued by the Ministry of Agriculture, Forestry and Fisheries (Note 1) The agricultural workforce from 1990 onwards is based on data for sales farming households. (Note 2) The proportions of sales farming households and full-time farming households refer to the percentages of total farming households accounted for by such households.

(Source) “Agriculture and forestry census” and “Agriculture management statistical survey, Management statistics according to management style (individual management) (reclassified aggregation)” issued by the Ministry of Agriculture, Forestry and Fisheries (Note) Full-time farming household: A household whose agricultural income consists of 50% and over of its total income and which have more than one person who is under 65 years old and engaging in agricultural businesses more than 60 days a year. Quasi full-time farming household: A household whose agricultural income consists of less than 50% of its total income and which have more than one person who is under 65 years old and engaging in agricultural businesses more than 60 days a year). Part-time farming household: A household which does not have any person who is under 65 years old and engaging in agricultural businesses more than 60 days a year.

2,000

2000

1995

60

2000

2005

2010

2014

8. Measures for Small and Medium-size Enterprises In order to revitalize small- and medium-sized companies/small-scale business operators who support industries, and the employment and livelihood of the Japanese people, the government shall provide support for new challenges in research and development, etc., and provide small- and medium-sized companies/small-scale business operators with intensive support for business management and financing and special measures for pass-on of consumption tax, etc.

○Breakdown of Expenditure on SMEs Measures (FY2014 Budget) (Unit：billion yen)

Others Expenditures for running the Organization for Small and Medium Enterprises and Regional Innovation, Japan (SMRJ)

22.8 (12.3%)

19.0 (10.3%) Support for ensuring the appropriate SMEs-related business transactions

Support for financing of SMEs

Expenditures on SMEs measures ¥ 185.3 billion METI 111.1 billion MOF 71.4 billion MHLW 2.8 billion

6.1 (3.3%)

100.0 (54.0%)

Improve the business environment of SMEs

4.1 (2.2%) Support for SMEs in management and promote their start-up

33.2 (17.9%)

○Trends in Expenditures on SMEs Measures (billion yen)

250

200

173.0

176.1 161.6

162.5

2006

2007

189.0

191.1

2009

2010

196.9 180.2

181.1

185.3

2012

2013

2014

150

100

50

0

2005

2008

(Note) Based on the initial budget.

61

2011

(FY)

9. Measures for Environment and Energy ○ Expenditure on Environmental Conservation The budgets necessary for steadily conducting environmental preservation activities such as waste recycling measures, as well as global environment conservation projects (e.g., the funding project for the adoption of recyclable energy), are secured. Breakdown of FY 2014 total expenditure for environmental conservation (¥1,718.2 billion) (unit: billion yen)

128.3

Conservation of the global environment The project to conserve and improve the forest environment; the funding project for the adoption of recyclable energy (Green New Deal Fund), etc. Conservation of biodiversity and sustainable use The project to develop the w ater source forest; improvement of national parks

495.5

Ensuring material cycle and establishing a recycling-oriented society Subsidy for project to dispose of w aste from disasters, etc.; the funding project to improve and construct the waste treatment facilities, etc . Conservation of w ater, soil, and ground environments Expenses to promote the prevention of w ater contamination; projects to improve the fishery environment

556.8

Conservation of clean air Subsidy for expenses to introduce clean energy automobiles; expenses to comprehensively address the issue of PM2.5 etc.

137.9 6.1

98.2 203.1

92.3

Establishment and promotion of comprehensive measures for chemical substances Projects for regulations over chemical substances; expenses to survey food safety/contracted laboratory work

Prevention of environmental pollution by radioactive materials Decontamination of soil contaminated w ith radioactive materials, etc.; projects to dispose of w aste contaminated w ith radioactive materials Measures that form the foundation of various project Expenses to run the National Institute for Environmental Studies; expenses to promote comprehensive environmental studies

○ Efforts Made to Achieve the Targets Set by the Kyoto Protocol Based on the Cancun Agreements under the United Nations Framework Convention on Climate Change, budget is secured to continuously take measures against global warming comprehensively and systematically in FY2014 and thereafter. Greenhouse effect gas emissions and the status of the Kyoto Protocol achievement ○ Japan’s total greenhouse gas emissions (final figures) in FY2012 were 1,343 Mt CO2 eq. (an increase of 6.5% compared to the base year (BY) and 2.8% compared to the previous year (PY)) ○ If the forest and other carbon sinks1 and Kyoto mechanisms credits2 are taken into account, the five-year average for total emissions during the first commitment period (CP1) of the Kyoto Protocol (FY2008-FY2012) shows an 8.4%3 decrease compared to the total emissions of the base year; therefore Japan will have achieved its target for the CP1 of the Kyoto Protocol (-6 % below base year level).

【FY2014 Budget 】

(unit: billion yen)

Budget for countermeasures against global warming【906.5】* * Overlap expenses for the above-mentioned environmental preservation

○ Effective approaches to reduce greenhouse gases by 2020

【338.5】

grants for the support of business operators promoting rationalization of the use of energy, project for promoting the adoption of recyclable energy, etc.

○ Effective approaches to reduce greenhouse gases after 2021

【190.3】

Outsourcing expense for the project for promoting the development of methane hydrate, Projects for promoting the R&D for strengthening measures for the reduction of CO2 emission, etc.

○Those eventually contributing to the reduction of greenhouse gases

【315.1】

Grants for promoting a recycling-oriented society , subsidy for projects to verify improved power grids for wind power generation, etc. 1: Forest and other carbon sinks: Removals by forest and other carbon sinks (forest carbon sink measures and urban revegetation etc) that can be used toward achieving the target. The removals by forest carbon sink measures exceeded the upper limit (238.3 Mt-CO2 for the five years) set for Japan for use toward achieving the target, therefore the value is the upper limit per year. 2: Kyoto mechanisms credits: Acquired by the government: Total credits that were acquired as of FY2013 year-end through the Kyoto Mechanisms Credit Acquisition Program (97.493 Mt) Acquired by the private sector: The amount of credits that were acquired by the Federation of Electric Power Companies of Japan (According to the Environmental Action Plan by the Japanese Electric Utility Industry [FY2013]) 3: Total emissions and removals for the Kyoto Protocol target will be finalized after the technical review process under the Kyoto Protocol and the Convention to be conducted in FY2014. Also, the Kyoto mechanisms credits will be finalized after the true-up period for the first commitment period (expected to be completed in the second half of 2015 or later).

62

○Fundamental programs, etc.

【62.6】

Project for the demonstration of technologies and systems for rationalization of international energy consumption, reinforcement of the “Ibuki” (GOSAT) observation system, improvement of the system for the development of the successor to “Ibuki,” etc.

10. Personnel Cost of National Public Servants Government has been pushing ahead with reforms on personnel cost on civil servants in terms of the number and salary of civil servants. Efforts Related to the Personnel Costs for National Civil Servants ○ Salary 

In order to deal with tough financial conditions and the aftermath of the Great East Japan Earthquake, salary was reduced in FY2012 and FY2013, as a temporal and exceptional measure under the present National Personnel Authority's recommendations. （ Terminated at the end of March in FY2014 as stipulated in “Act on revision and temporary exception of salary of national civil servants” ）



Salaries for civil servants continue to be adjusted by conducting comprehensive review of the system in terms of reducing the salaries’ gap between the government and private companies in some areas where the level of salaries of private companies is lower and revising the salary allocation among generations within the government.

○ Retirement benefits 

Based on the comparison of the level of retirement benefits between the government and private companies in FY2013, the level of retirement benefits was gradually reduced from about 27 million yen to about 23 million yen (about minus 4 million yen, about minus 14.9%) from January 2013 to July 2014.

○ Number of employees 

As for administrative agencies, the number of government officers has reduced by 32,206 from FY2010 to FY2014 and this result has successfully achieved the target set in the Government Officers Reduction Plan, where the number of government officers is reduced by 30,244 ,while properly addressing the important policy issues. The base of the number of reduced employees: minus 7,136 people over 5 years (FY2014: minus 1,203 people)

(Reference 1) Personnel Costs and Number of Civil Servants Local government officials

Central government officials

Number of personnel 2,752 thousand Personnel cost 23.0 trillion yen

Number of personnel 558 thousand Personnel cost 5.1 trillion yen

Administrative agencies

General administration

Number of personnel 297 thousand

Self-defense officials, Special agencies

Number of personnel 909 thousand

Police staff, fire fighters and

Education (teachers at public schools) Number of personnel 1,038 thousand

Number of personnel 260 thousand

Number of personnel 443 thousand

public corporation employees Number of personnel 363 thousand

(Note 1) Numbers of personnel of national administrative organs and special organs refer to total numbers according to the general account and special account (budget number of personnel at the end of FY2014), the number of self-defense officials refers to the actual number, and numbers of local civil servants refer to those as of April 1, 2013 according to “Local financial situations (March 2013)” issued by the Ministry of Internal Affairs and Communications. (Note 2) The special organs refer to the Diet, Courts of Justice, Board of Audit and National Personnel Authority. (Note 3) Personnel expenditures refer to the total amount of the general account and special accounts at the national level (based on the budget for FY2014), and the settlement amount of the general account for FY2012 at the local level based on “Local fiscal situations (March 2014)” (Ministry of Internal Affairs and Communications).

(Reference 2) International Comparison of the Number of Civil Servants per 1,000 People Japan Germany U.S. U.K. France

36.4

2.7

Total of civil servants

59.1

2.6

65.5

4.5

74.8

5.8

88.7

25.0

0

10

20

30

40

50

60

70

80

90

100 (people)

(Note 1) Data prepared by Cabinet Bureau of Personnel Affairs, Cabinet Secretariat (Note 2) The figures represent the FY2013 data for Japan , the FY 2012 data for U.K., the U.S. and France , the FY2011 data for Germany. (Note 3) represents the number of civil servants at the central government level (excluding defense).

63

Supplement1. Special Accounts Japan’s public finance account consists of the General Account, under which general expenditure of the government is covered by tax and other revenues, and Special Accounts, which are set up to carry out specific operations using specific revenues (insurance contributions, etc.). Special Accounts are established with the aim of clearly indicating the relationship between benefit and burden, as well as the revenue and expenditure of each operating entity.

Ex. Pension payments Single account If accounted for separately…

General tax revenues, etc.

Pension premiums

Accounting of general administrative activities + Accounting of pensions

General expenditures

Accounting of pensions

Government share

Pension payments

General account Accounting of general administrative activities

Defense expenditures, education expenses, etc.

Special Accounts Accounting of pensions

Pension reserves

The relationships between benefits and burdens with regard to pensions are not clear because general tax revenues, pension premiums, general expenditures and pension payments are accounted for together.

pension reserve

Pension payment

The relationships between benefits and burdens are clear because accounting of pensions are accounted separately.

○Special Account List ・ Special Account for Local Allocation Tax and Local Transfer Tax (Cabinet Office, Ministry of Internal Affairs and Communications, Ministry of Finance)

・ Special Account for Earthquake Reinsurance (Ministry of Finance)

・ Special Account for Government Bonds Consolidation Funds (Ministry of Finance)

・ Special Account for Foreign Exchange Funds (Ministry of Finance)

・ Special Account for Fiscal Investment and Loan Program Funds (Ministry of Finance, Ministry of Land, Infrastructure, Transport and Tourism)

・ Special Account for Forest Insurance (Ministry of Agriculture, Forestry and Fisheries)

・ Special Account for National Forest Service (Ministry of Agriculture, Forestry and Fisheries)

・ Special Account for Fishing Boat Reinsurance and Fishermen’s Mutual Aid Insurance (Ministry of Agriculture, Forestry and Fisheries)

・ Special Account for Trade Reinsurance (Ministry of Economy, Trade and Industry)

・ Special Account for Patent Registration (Ministry of Economy, Trade and Industry)

・ Special Account for Social Infrastructures Improvement (Ministry of Land, Infrastructure, Transport and Tourism)

・ Special Account for Measures for Energy (Ministry of Education, Culture, Sports, Science and Technology, Ministry of Economy, Trade and Industry, Ministry of the Environment)

・ Special Account for Labor Insurance (Ministry of Health, Labour and Welfare)

・ Special Account for Motor Vehicle Safety (Ministry of Land, Infrastructure, Transport and Tourism)

・ Special Account for Reconstruction from the Great East Japan Earthquake* (The Diet, Court of Justice, Board of Audit, Cabinet, Cabinet Office, Reconstruction Agency, Ministry of Internal Affairs and Communications, Ministry of Justice, Ministry of Foreign Affairs, Ministry of Finance, Ministry of Education, Culture, Sports, Science and Technology, Ministry of Health, Labour and Welfare, Ministry of Agriculture, Forestry and Fisheries, Ministry of Economy, Trade and Industry, Ministry of Land, Infrastructure, Transport and Tourism, Ministry of the Environment, and Ministry of Defense) * Established in FY2012

・ Special Account for Pension (Ministry of Health, Labour and Welfare)

・ Special Account for Food Supply (Ministry of Agriculture, Forestry and Fisheries)

・ Special Account for Agricultural Mutual Aid Reinsurance (Ministry of Agriculture, Forestry and Fisheries)

64

Expenditures of Special Accounts (Flow) 〔FY2014 budget〕 The total expenditures of Special Accounts are 411.4 trillion yen. The net expenditure of these accounts is 195.2 trillion yen after deducting transfer of funds among these accounts. Most of the net expenditures comprise government bond repayment costs, social security payments, grant of local allocation tax, and transfer to the Fiscal Loan Funds (fund-raising via fiscal investment and loan bonds, etc.). 8.8 trillion yen if these are excluded. 5.8 trillion yen if the expenditures (3.0 trillion yen) for the reconstruction from the Great East Japan Earthquake, which is a special factor, are further excluded. (down 2.5 trillion yen from the previous year) The figure in parentheses is FY2013 initial budget.

Total Expenditure of Special Accounts : ¥411.4 trillion（¥386.6 trillion） ※ 53.7 trillion yen is transferred from the General Accounts (23.3 trillion yen to the Special Account for Government Bonds Consolidation Funds, 16.2 trillion yen to the Special Account for Local Allocation and Local Transfer Tax, and 12.1 trillion yen to the Special Account for Pension)

Net Amount: ¥ 195.2 trillion （¥185.4 trillion）

Transfer to Fiscal Loan Program Fund

Local Allocation Tax Grants, etc.

¥16.6 trillion (11.6)

¥19.3 trillion (20.0)

(15.6)

(20.0)

¥5.8 trillion

Social Security Benefits （Note） ¥ 58.9 trillion

Transfer in and out among accounts ¥ 94.1trillion

Refunding of JGBs ¥122.1 trillion

(89.1)

(112.2)

Redemption of the national debt

¥ 91.7 trillion (84.0)

(57.8)

○ Expenditures needed for the redemption of government bonds and interest payments ○ Expenditures for pension benefits, health insurance benefits and other social security benefits payable in accordance with applicable laws

○ Measures for local government finances (including the special delivery tax for earthquake disaster reconstruction: 0.6 trillion yen (0.6 trillion yen)) ○ The transfer of funds raised by issuing fiscal investment and loan bonds as resources for Fiscal Loan Funds ○ Reconstruction expenditures: 3.0 trillion yen (3.8 trillion yen)

Surpluses in Special Accounts (Flow = difference between revenues and expenditures at the time of account settlement) “Account Settlement Surpluses”, which means difference between revenues and expenditures in each Special Account, are 13.7 trillion yen in FY2013 (excluding the Special Account for Government Bonds Consolidation Fund). These surpluses are transferred to 1) reserves (2.7 trillion yen), 2) revenues in the next fiscal year’s Special Accounts (9.4 trillion yen), 3) the General Account (1.7 trillion yen). Surpluses which are able to be transferred to the General Account are utilized the fullest extent.

◆ Disposition of surpluses in main Special Accounts (FY2013 Settlement) Special Accounts (Account)

Surpluses

Major Factor

Major Method of Disposition

Foreign Exchange Funds

¥3.2 trillion

・Asset management earnings (difference in interest rates between foreign currency-denominated asset holdings and yen-denominated liabilities (Financing Bills))

・¥ 1.9 trillion: Transferred to FY2014 General Account ・¥ 0.9 trillion: Transferred to FY2014 Special Account revenues

Reconstruction from the Great East Japan Earthquake

¥2.4 trillion

・Businesses were transferred from previous fiscal year by delaying due to the difficulty of local negotiations

・Transferred to FY2014 Special Account revenues to budget for reconstruction businesses transferred to FY2014.

Local Allocation and Local Transfer Tax

¥2.3 trillion

・Remaining amount of Local Allocation Tax Grant was transferred to the next fiscal year.

・Transferred to the FY2014 Special Account revenues to cover the Local Allocation Tax Grants, etc. in FY2014.

Social Infrastructure Improvement

¥1.3 trillion

・Businesses were transferred from previous fiscal year by delaying due to the difficulty of local negotiations

Pension (Basic pension, National pension・Employee’s pension, Health))

¥1.1 trillion

・Pension benefits were lower than projections.

・Transferred to reserves to cover pension benefits in FY2014 and following years.

・Transferred to the FY2014 General Account which is inherited after the abolition of this special account to budget for construction fees, etc. transferred to FY2014.

Measures for energy

Nuclear Damage Compensation

¥0.5 trillion

・Recourse of Subsidy Bonds from the Nuclear Damage

・Transferred to the FY2014 Special Account revenues to budget for the

Liability Facilitation Fund were lower than projections.

redemption of Subsidy Bonds, etc. transferred to FY2014.

Energy Demand and Supply

¥0.5 trillion

・Expenses

Government Debt Consolidation Fund

of subsidized businesses were transferred from previous fiscal year by the delay of the projects by subsidized companies.

・Transferred to the FY2014 Special Account revenues to budget for subsidized businesses transferred to FY2014.

① Basic balance: 23.3 trillion yen (systematically saved for government bond repayment in future. The expenditure right is granted in anticipation of unforeseen circumstances). ② Issue of advance bonds: 3.0 trillion yen (refunding bonds issued for government bond repayment for the following year, etc.)

65

Accumulated fund of special accounts, etc. (stock)

(As of FY2013 settlement)

The reserve funds of special accounts amount to approximately ¥134.0 trillion as of the settlement of FY2013. However, more than 90% of this total is related to insurance services, such as national pension, and is reserved to cover benefit payments in the future. Of which Pension ¥ 113.3 trillion (National Pension ¥ 7.1 trillion) (Welfare Pension ¥ 103.2 trillion) Labor Insurance ¥ 14.5 trillion (Industrial Injury ¥ 7.8 trillion) (Employment ¥ 6.7 trillion) etc.

Other ¥ 0.2 trillion

Special Account for Government Bonds Consolidation Fund: ¥ 3.0 trillion

Special Account for Measures for Energy ¥ 0.1 trillion

(This account are financial resources to future government bond redemption and are entitled to disburse in order to prepare for any contingency)

Special Account for Food Supply (foodstuff control account) ¥ 0.2 trillion

Total ¥ 134.0 trillion

Insurance Services, such as National Pension: ¥ 130.1 trillion (preparing for future payments)

Special Account for Foreign Exchange Funds: （Equivalent amount of old deposit in foreign exchange fund）¥ 22.7 trillion

The deposit system is to be abolished after the settlement in FY2013 and yen funds equivalent to old deposit are to be allocated for redemption of Financing Bills in order.

Special Account for Foreign Exchange Funds: ¥ 0.6 trillion (for preparing for possible financial loss resulting from fluctuations of foreign exchange rates or interest rates)

About the reform of special accounts - Some special accounts have been abolished, integrated and revised, and the number of special accounts was decreased from 31 to 17 by FY2011 under the “Special Account Act” (approved in March, 2007) - From FY2014, some special accounts will be additionally abolished, integrated and revised and the number of special accounts will be 15 (the number of special account will be reduced from 18 to 15 and that of item will be reduced from 52 to 35) under the Act for Partial Revision to the Special Account Act (approved on November 15, 2013). - 2 special accounts out of 15 are scheduled to abolish in series for the future under the Basic Policy for the Reform of Incorporated Administrative Agency, etc. (Cabinet decision, Dec. 24 2013) Spa ci a l A ccount （F Y2006）

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

Spa ci a l A ccount （F Y2006）

Road improvement

Foodstuff control

River conservation

Measures for reinforcement of operational basis for agriculture

Harbour improvement

for general account

Infrastructure development

Airport improvement Financing for urban development fund

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

Stable supply of food

Guarantee for the automobile accident compensation Motor vehicles inspection and registration

Motor vehicles safety

for Incorporated Administrative Agency

National Center for Advanced and Specialized Medical Care

Pension National pension

for general account

Registration

Seamen's insurance Worker's insurance Worker's insurance These special accounts will be integrated into the special accont for stable supply of food.

Agricultural mutual reinsurance Fishing craft reinsurance and mutual relief Earthquake reinsurance

Consolidation of specified national properties Electric power development promotive measures Measures for structural improvement of petroleum and energy supply and demand Industrial investment Government loan fund

Forest insurance

abolished by the end of FY2014 (transfer to incorporated administrative agency)

National debt consolidation fund

External trade reinsurance

abolished by the end of FY2016 (new corporation inherit assets and liabilities of this account)

Foreign exchange funds

Debt management of national forest and field service (temporary special account)

National forest and field service for general account

for general account

Measures for energy

Government investment and loan fund

Grants of allocation tax and transferred tax Reconstruction from the Great East Japan Earthquake

66

FY 2013

FY 2014 This special acount will be integrated with the special account for agricultural mutual reinsurance and that for fishing craft reinsurance and mutual relief

Patents

Welfare insurance

National land improvement works

FY 2007

newly established at FY2012

FY 2015

FY 2016

Net total for each major expenditure in general and special account The net total for major expenditures represents the net sum (i.e. the sum of the General Account total expenditures (FY2014: ¥ 95.9 trillion) and the Special Account total expenditures (FY2014: 411.4 trillion) less transferring in and out among accounts) sorted for each policy field. In other words, it refers to the overall picture of the central government’s expenditures. Fiscal Resources for loans provided by the central government

(Unit: trillion yen)

* Others Public works ¥ 7.1 trillion Education & Science ¥ 5.6 trillion National defense ¥ 4.9 trillion Food supply ¥ 1.9 trillion Energy ¥ 1.3 trillion Economic Assistance ¥ 0.5 trillion Former Military Personnel Pensions ¥ 0.4 trillion Promotion of SMEs ¥ 0.2 trillion Miscellaneous ¥ 7.3 trillion Contingency Reserve for acceleration of reconstruction & revitalization of Fukushima ¥ 0.6 trillion General Contingency Reserve ¥ 1.0 trillion

Others * 30.9

Fiscal Investment Loan Program Bonds 17.3

Social Security 78.6

Local Allocation Tax Grants, etc. 19.2

Total 237.4

National Debt Service 91.4

Fiscal resources to maintain government service for local government that have limited revenue

Pension, Medical Care, Long-term Care, Unemployment Benefits, Public Assistance, etc. Interest payments and repayment of national debt

(Note) FY2014 initial budget basis

○ Trends in the net expenditure budget of the General Account and the Special Accounts (Unit: trillion yen) FY2012 Settlement

FY2013 Settlement (prospected)

FY2014 Initial Budget

Total Expenditure of the General Account (A）

97.1

105.7

95.9

Total Expenditure of the Special Account (B)

377.0

394.5

411.4

Total (C = A + B)

474.1

500.2

507.3

141.3

147.0

147.8

332.8

353.1

359.5

of which, the amount deducted (F)

111.0

110.8

122.1

Net Total (= E – F)

221.9

242.3

237.4

Item

of which, the amount overlapped (D)

Difference (E = C – D)

(Note) The amount deducted refers to refinance redemption amount in the Special Account for Government Bonds Consolidation Funds.

67

Supplement 2. Thorough Improvement of Budget Efficiency The government thoroughly improves budget efficiency through enhancing the PDCA cycle for evaluating how budget funds are spent as well as what kind of results the budget has yielded, and then making use of evaluation results for future budgetary planning process.

◆ Reflection of the resolutions of the Diet, the reports on inspection of the settlement of accounts, etc. ○ With regard to the resolutions concerning the settlement, adopted by the Diet, they are accurately reflected in the budgets. Reflecting the review of some expenditure items related to restoration and reconstruction from the Great East Japan Earthquake which have little relation to restoration and reconstruction [Reflected amount: 105.4 billion yen] ○ As pointed out by the Board of Audit, each administrative task and project are rechecked as to their necessity and efficiency. Returning funds which was made by public organisations with subsides from the government [Reflected amount: 122.8 billion yen] [Amount reflected in the FY2014 budget: 209.6 billion yen] ○ As for the projects, etc. generating a large amount of wastage, the details of each budget will be strictly revised according to the settlement results. Appropriate reflection of the unused budget of state subsidy to compulsory education [Reflected amount: -5.1 billion yen]

◆ Reflecting the results of budget execution survey ○ For FY2013, the budget execution survey was conducted on 75 occasions, while promoting the improvement of survey quality by using knowledge on external key figures, etc. Based on the results of this survey, the necessity, effectiveness and efficiency of projects, etc., were reviewed, and the findings are reflected in the budgets by abolishing all or some of them. Improving efficiency of demonstration projects for carbon dioxide reduction technology through reflecting the actual contract results [Reflected amount: -3.5 billion yen] [Amount reflected in the budget for FY2014: 26.3 billion yen] *` The budget execution survey is conducted by officials of the Budget Bureau of the Ministry of Finance, or those of Local Financial Bureaus, who regularly attend and witness the execution of budgets. They conduct the survey of such activities, point out the matters to be improved, and eventually revise the budgets and rationalize their budget execution.

◆ Utilization of policy evaluation ○The results of policy evaluation are utilized in budget formulation in accordance with the Government Policy Evaluation Act. As for “promoting of farming management by motivated and diversified farmers”, the index of the amount of loan outstanding exceeded the target value. Thus the Government shrunk the relevant budget amount through reviewing the lending amount of the measures to reduce the interest rate burden. [Used amount: 130 million yen] [Amount reflected in the budget for FY2014 27.0 billion yen]

Check

Plan (Planning the budget)

Do (Executing the budget)

(Evaluating and verifying the budget) - Budget execution survey - Audit reports - Policy evaluation, and other measures 68

Action (Incorporating the evaluation results)

Plan (Planning the budget)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

△ 12.0

Nominal GDP growth (68SNA f or FY 1964- 1979, 93SNA f or FY 1980- 2014） (Actual results f or FY 1964-2012, projection f or FY 2013 and 2014)

35

30 45

△ 6.1

△ 7.0

△ 0.4

△ △ 0.9

New goals f or medium-term f iscal management Dependenceon special def icit-f inancing bond issues ended

Introduction of consumption tax

Utilizationof proceeds f rom NTT share sales

Promotion of f iscal ref orm

Minus ceiling Goal set to end dependence on bond issues in 1990

Zero ceiling

Global recession First step toward f iscal reconstruction

Goal set to end dependence on bond issues in 1984

Second oil crisis Locomotiv e theory

Activ e f iscal policy for 7% growth at Bonn Summit

Activ e f iscal policy backed by a cuurent account surplus

Goal set to dependenceon bond issues in 1980

Supplementary budget to launch special def icit-f inancing bonds

2 trillion y en in tax cuts

First oil crisis First y ear of high-lev el social welf are

Nixon Shock (August)

Ef f orts to reduce bond dependency with tax rev enue rise resulting f rom high economic growth

Introduction of construction bonds

FY 1965 Supplementary budget to issue rev enue-cov ering bonds

69

△ 3.3 △ 3.6

0.3

0.0 0.5 0.5 0.1 0.9 0.4 0.3 0.2 0.3 0.2

0.0

5.7 5.6

Tax Rev enue Settlement minus Initial Budget

8.0

2.1 1.3 2.2 1.3 2.3

3.0

△ 0.4 △ 0.2

△ 2.0

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

△5

Bond dependency ration (ratio of bond issues to total expenditures)

50

Recession

(Reference) Trend in Fiscal Situation 60

(%)

55

40

25

20

15

10

5

0

（trillion yen）

3.9

△ 7.4 △ 7.2

△ 9.3 △ 9.1 △ 8.1

△ 2.8 △ 3.0 △ 2.6

0.1

△ 3.9

1.6

0.7

1.5 2.1

4.1 3.2 3.8

△ 2.4 △ 1.8 △ 2.0

Bond issues (trillion yen) Construction bond

Special deficit-financing bond

5.1

35 Special deficit-financing bond

Consumption tax hike f rom 5% to 8% In the initial budget, tax rev enues exceeded the amount of gov ernment bonds issued f or the f irst time in these f our y ears

Urgent Economic Countermeasures f or the Rev iv al of the Japanese Economy are announced.

44.3 trillion y en gov ernment bond issuance planned in the initial budget

Economic crisis countermeasures are announced

"Emergency Economic Countermeasures f or Future Growth and Security " are announced

A set of three economic measures totaling 75 trillion y en is announced.

New gov ernment bond issuance reduced by 4.5 trillion y en, hitting record-high reductionof gov ernment bond issuance

29.97 trilllion y en gov ernment bond issurance planned in the initial budget

30 trillion y en gov ernment bond issuance planned in the initial budget

Permanent national and local tax cuts worth more than 6 trillion y en Suspension of the Fiscal Structure Ref orm Act

4 trillion y en in special tax cuts

Consumption tax rate hike Enactment of the Fiscal Structure Ref orm Act

6 trillion y en in income and other tax cuts

Special def icit-f inancing bond issues resumed

(Accumulation of gov ernment bonds ended)

70

41.3 40.9 42.3 42.8

39.2% Construction bond

47.5

△5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (FY)

45 40.8%

43.0%

44.4%

42.5% 52.0

(Actual result f or FY 1964-2013, Draf t budget f or FY 2014))

55 51.5%

48.9%

33.2

25

15

5

△ 0.1

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (FY)

MEMO

71

MEMO

72

MEMO

73