Japan to consider tapping FX account to boost defense spending – Kyodo

TOKYO – Japan‘s government is considering tapping funds under an account set aside for foreign exchange intervention to pay for an expected increase in defense spending, Kyodo news agency reported on Tuesday.

The government could also issue additional bonds until a decision is made on whether to raise taxes as a long-term source of funding for the scheduled spending increase, Kyodo said without citing sources.

Prime Minister Fumio Kishida instructed his ministers on Monday to work on a plan to lift defense spending‘s share of gross domestic product to 2% within five years, from about 1% now, which would strain Japan‘s already tattered finances. The increase amounts to roughly 11 trillion yen ($79.42 billion).

The defense ministry and the fiscal hawks of the finance ministry have been at odds as to how much the government should spend to bolster Japan‘s defense capabilities.

A senior government official declined to comment on the media report. The special account that manages foreign reserves has been tapped the past to fill shortfalls in the general account budget. The fund reaps 2 trillion to 3.5 trillion yen ($14 billion-$25 billion) in retained earnings annually, Kyodo reported.

The proposal highlighted the government’s struggle to scrape together defense funding while dealing with the industrial world’s heaviest debt burden – more than twice the size of Japan‘s economy.

The Ministry of Finance has been wary of tapping the surplus funds, as they are held in case intervention is needed in the foreign exchange market.

Opposition from within the ruling bloc against tax increases has clouded the prospects for more defense spending, leaving more debt issuance and cuts in other spending as the two other leading options.

Lawmakers at an LDP tax panel meeting on Monday suggested tax breaks including capital gains, a Nippon Individual Savings Account (NISA) tax-free investment scheme to corporate research and investment, start-up businesses, inheritance and gifts.

Yoichi Miyazawa, head of the LDP tax commission, told reporters on Monday that he was ready to debate tax increases to fund more defense outlay, but that such talks should wait until the government comes up with estimates on funding sources. – Reuters