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Govt to tap forex fund for 3 trillion yen / Cash to cover tax shortfall in FY11 budget

The Finance Ministry will likely tap into cash reserves of a special foreign-exchange account to make up for an expected major tax revenue shortfall in the fiscal 2011 budget, sources said Saturday.

The government is expected to take about 3 trillion yen from interest earned on foreign currency bonds it bought during an exchange intervention to curb appreciation of the yen earlier this year, according to the sources.

Of the 3 trillion yen to be used from the reserves, sometimes called "buried treasure," 1 trillion yen to 2 trillion yen will come from gains made in fiscal 2010 and the rest will be taken from projected interest on the reserves during the next fiscal year, the sources said. A total of 350 billion yen from the reserves already has been incorporated into the 2010 budget.

While the government usually shies away from counting on expected interest profits from future fiscal years, revenue shortfalls have forced the state to take an advance out on future earnings for the second year in a row.

The general account--used for policy-related expenses--in the fiscal 2011 budget is projected to be about 92 trillion yen, and the government plans to cap new government bond issuance at 44 trillion yen. Since tax revenue next fiscal year is expected to total 41 trillion yen to 42 trillion yen, the government needs to secure 6 trillion yen to 7 trillion yen from somewhere.

In addition to the reserves from the foreign-exchange special account, the Finance Ministry hopes to gain about 1 trillion yen from surplus funds and reserves in a fiscal investment and loan program account, another 1 trillion yen from a 1.45 trillion yen surplus of the Japan Railway Construction, Transport and Technology Agency, and 180 billion yen from profits on sales of government-held NTT stock.

The government also wants to raise cash by selling real estate held by independent administrative institutions and collecting payments from the Bank of Japan and the Japan Racing Association.

As of the end of last month, the government had a total of 1.1 trillion dollars (92 trillion yen) in foreign currency reserves in the special exchange account.

The government has accumulated profits every year from interest on U.S. and other foreign bonds, which it purchased with foreign currencies obtained through such exchange interventions. In fiscal 2009, the government had 2.9 trillion yen in surplus funds making an investment yield of 3.08 percent.

Since the funds to be used to make up for the tax revenue shortfall would include profits expected to accumulate in fiscal 2011, another financial crisis could devastate global monetary markets and wipe out the gains the government is counting on.

Experts say the government's projections for 42 trillion yen in tax revenue might need to be lowered because the state's plans to cut the corporate tax rate by five percentage points as part of fiscal 2011 tax reforms could start having an impact in the latter half of fiscal 2011.

(Dec. 19, 2010)
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