Japan finance minister defends fiscal discipline as construction bonds approved

August 24, 2016 3:55 PM EDT

Taro Aso, Japan's Deputy Prime Minister, attends a panel for the High-level Tax Symposium held in Chengdu in Southwestern China's Sichuan province, July 23, 2016. REUTERS/Ng Han Guan/Pool

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By Stanley White

TOKYO (Reuters) - Japan's finance minister stood by the government's target to return to a primary surplus in fiscal 2020, but fiscal discipline is in doubt after the government approved an extra budget that raises spending to the highest in three years.

Aso spoke to reporters after the cabinet approved a $33 billion supplementary budget that is mostly financed by bonds earmarked for construction projects to help fund Prime Minister Shinzo Abe's multi-year economic stimulus package.

The 3.2869 trillion yen ($32.75 billion) budget, the second supplementary budget for the fiscal year that started in April, includes issuance of 2.75 trillion yen in so-called construction bonds, a statement from the finance ministry showed.

Abe has shifted his economic policy to focus on building infrastructure across the country, but some economists worry that the government is losing appetite for fiscal discipline.

"There's no change to our thinking," Aso said. "We're focused on achieving a primary budget surplus in fiscal 2020."

The extra budget will raise spending for the current fiscal year to 100 trillion yen, the highest in three years.

The extra budget approved on Wednesday covers only part of a multi-year stimulus package approved by the cabinet on Aug. 2.

The stimulus package has a headline figure of 28.1 trillion yen, including 7.5 trillion yen in combined spending by the national and local governments.

The money will be spent on improving the railway network, upgrading ports, shoring up areas prone to natural disaster and improving wages for daycare workers.

The government was able to offset some of the costs of the extra budget due to a 417.5 billion yen decline in debt servicing costs. The government also used 410.0 billion yen in funds left over from an earthquake relief package compiled earlier this year.

Some economists have warned against further government stimulus because Japan's public debt burden is already the worst among advanced countries, at twice the gross domestic product.

However, advisers close to Abe have argued that tax revenue will increase if stimulus spending leads to higher nominal growth, so the government should not worry too much about deficit spending in the short term.

($1 = 100.3500 yen)

(Reporting by Stanley White; Editing by Richard Borsuk)

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