TOKYO (Dow Jones)--
Beset by plunging popularity and the indictment of its prime minister's former aide, the Japanese government Friday unveiled a $1.015 trillion budget outline for its next fiscal year that offers a slew of programs for the public but could raise worries about the nation's fiscal health.
The budget announcement follows the indictment without arrest Thursday of a former state-paid secretary to Prime Minister Yukio Hatoyama, a development that adds to the challenges facing Japan's three-month-old government. Political analysts say the episode isn't crippling to Hatoyama, who has denied knowledge of the matter and doesn't face charges, but it adds to pressures that already include a weakened domestic economy and strained relations with the U.S.
"The scandal in itself is not so serious, but it tarnishes his reputation further and diminishes his power to be an effective prime minister," said Seiji Adachi, senior economist with Deutsche Bank, who sees the potential for Hatoyama to resign next year if his numbers don't improve.
The government hopes the budget's inclusion of steps such as allowances for families raising children and free public high school education will help boost its popularity going into an Upper House election next summer.
Hatoyama's Democratic Party of Japan campaigned on similar promises, contributing to its landslide election victory in August.
"I believe that we have delivered all we can without compromising fiscal discipline," Hatoyama said at a news conference Friday. "Our country's economic and employment conditions are very severe. The most important thing for us is to protect the lives of the Japanese citizens."
The budget will require massive debt issuance that could add to concerns about the fiscal health of Japan, which has a debt level that's already the worst among industrialized nations at 180% of gross domestic product. Tokyo is planning on issuing 44.303 trillion yen in new government bonds, the highest ever for an initial budget plan. That was slightly above its goal of keeping the debt float at about Y44 trillion.
On Thursday, Tokyo prosecutors indicted Hatoyama's former state-paid secretary without arrest on a charge of falsifying the premier's funding reports in violation of the political funds control law. Hatoyama apologized over the matter but said he intends to stay in office.
"It would be wrong for me to resign now, as that would mean abandoning my responsibility to meet peoples' expectations of me to make new policy," he said Thursday. He added, "I should respect it if calls for resignation rise to an overwhelming extent. But I will do my best not to let that happen by explaining fully."
Local newspaper polls show the Hatoyama government's approval rating has fallen below 50%, compared with levels above 70% when it first took office in September.
The indictments are particularly painful for Hatoyama because they run contrary to his image as a reformer, political analysts say. The DPJ's predecessor in Tokyo, the Liberal Democratic Party, was tarred by a series of scandals in recent years that eroded its public support.
"This is a small scandal in financial terms but it does give the impression that he tarred with the same brush as his predecessors," said Peter Tasker, strategist at Arcus Research.
That means Hatoyama faces increased pressure to carry out his domestic agenda, despite daunting budget pressures.
"He can rely on a bedrock of public support to get him past next year's elections but he has to deliver," Tasker said, adding, "I would be surprised if he steps down, but if after another year he has not proved his worth then it will be a different story."
Prosecutors in Tokyo Thursday accused Keiji Katsuba, 59, of falsifying fund reports beginning in 2000 by padding income from parties and listing dead people as donors. He couldn't be reached for comment.
According to Hatoyama's lawyers, he did this because he didn't want Hatoyama to look like an unpopular politician who couldn't raise money from a broad number of people. According to the lawyers, some of the funds attributed to non-existent people came unknowingly from Hatoyama's mother, totaling Y15 million a month from summer 2002 until this past June.
A second former aide, Daisuke Haga, 55, was accused of negligence Thursday for not noticing discrepancies and ordered by a Tokyo court to pay a Y300,000 fine. Haga couldn't be reached.
Hatoyama said Thursday he would immediately pay any unpaid donation taxes, which could total Y600 million.
The Japanese government Thursday said it expects an anemic economic recovery to hold down tax revenue. Tokyo predicts Japan's economy will expand by 1.4% on a price-adjusted basis but only 0.4% on a nominal basis. Tokyo estimates its tax income will come to Y37.396 trillion, which marks the first time in the post-WWII era for the estimate to be below the new debt issue plan on an initial budget basis, the Ministry of Finance said.
The budget plan will contain Y53.454 trillion in policy spending, and 51% of that will go to social security programs. That represents the first time for it to account for over half of the total, according to the finance ministry, reflecting the DPJ-led government's focus on jump-starting individual spending over the type of big public works projects carried out by former administrations.