I BUDGET SYSTEM AND PROCESS

    The Constitution, as well as the Public Finance Law prescribes that the government must prepare a draft budget each fiscal year, present it to the Diet for approval, and then implement the approved budget in an appropriate manner to the benefit of the public. This chapter provides an overview of the Japanese budget system and process.
    The main rules and processes of the Japanese budget system, which are particularly important in understanding the system, are as follows. The details of the individual rules and processes will be explained later in this chapter.
    The fiscal year in Japan begins on April 1 and ends on March 31 the next year. The budget is compiled each fiscal year, and the expenditures for each fiscal year must be covered by the revenues from that year.
    The national government's budget consists of the General Account and several special accounts. The General Account is the basic account of the government, providing a snapshot of the overall framework of government's policies. Special accounts are established by legislation under specific conditions, such as the necessity to carry out specific projects. As of April 2003, there are 32 special accounts in the national government.
    The budget formulation process begins from the previous fiscal year, when the Cabinet approves the Guidelines for budget requests, usually during the summer. Each Ministry and Agency submits its budget requests according to the Guidelines, and based on such requests, the Ministry of Finance examines the budget in close consultation with the other concerned Ministries. In late December, based on the results of the examination by the Ministry of Finance, the Cabinet approves the draft budget to be submitted to the Diet next year. The Diet will start an intensive deliberation of the draft budget usually from late January. After approval of the draft budget in the Diet, the actual implementation of the budget begins from the new fiscal year. Finally, when the fiscal year ends, each Ministry and Agency prepares settlements of accounts and submits them to the Ministry of Finance. The Ministry will compile the individual settlements to produce an overall settlement of accounts. This overall settlement will be submitted to the Diet for approval, along with the audit report of the Board of Audit.
    On January 6th 2001, simultaneous to the reorganization of the Japanese Central Government, the Council on Economic and Fiscal Policy was launched as a forum to support the Prime Minister in exerting his leadership. In 2002, the council held 42 meetings, and had a big influence on budget formulation ideals and process. Contributions made by the council in 2002 includes ; 1) "Structural Reform and Medium-Term Economic and Fiscal Perspectives" in January, which presents medium-term fiscal consolidation targets and measures to achieve them, 2) "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002" in June, which set broad guidelines for the FY2003 budget , and 3) "Guidelines for Formulation of the FY2003 Budget" in December, which showed detailed guidelines for the FY2003 budget.

The national government's budget consists of the General Account budgets and 32 Special Account budgets. These budgets are submitted to the Diet for approval along with the budgets of 9 government-affiliated financial agencies. The common rules underlying these three types of budget are as follows.
(a) Each and every item in government expenditures as well as revenues must be included in the budget in its entirety.
(b) The expenditures incurred in a particular fiscal year must be matched by the revenues received during that fiscal year.
(c) Unlike the budgetary system in most other countries, the sources of revenues include government bonds, in addition to tax, so that the total amount of revenues in the budget always equals that of expenditures each year.

(1) General Account budget
    The General Account budget, commonly referred to as "the budget", is the basic account of the government. The expenditures in the General Account are classified by major government programs, such as public works, social security, education and science, national defense, economic cooperation, and energy measures. The General Account shows the snapshot of the overall framework of the government's policies. All national taxes are treated as the revenues of the General Account except for certain earmarked taxes, such as local road taxes and special tonnage duty.

(2) Special Account budgets
    Special accounts are established by legislation under specific conditions. The accounts may be instituted when the government needs to carry out specific projects, to administer and manage specific funds, or to administer revenues and expenditures separately from the General Account. Each special account basically has its own distinct source of revenues, such as receipts from government enterprises, social insurance contributions, and interest payments from loans outstanding. Also, the revenues of some special accounts may include borrowed funds.
    As of April 2003, there are 32 special accounts, and they are classified into several groups as shown in Table I-1.